Anyone who sells a property in Maryland, but is a “non-resident” of the state of Maryland, must pay a withholding tax at the time of the sale of their property.
The Maryland Office of the Comptroller, Revenue Administration Division, oversees this withholding tax, and sellers who are not residents of the state of Maryland must file for an exemption or partial exemption 21 days in advance of their settlement date.
The law has been in place since 2003, but there is still confusion about the withholding. There are two different withholding rates: one rate is for individuals and trusts at 8% and the second is for business entities at 8.25%. Simply put, a non-resident is a person who resides in another state or country. But the Comptroller’s office explains, “If you have an individual client who has lived in Maryland and was a Maryland resident, they will be a resident until they establish residency in another state.”
A list of common misconceptions was provided as follows:
Is it a tax?
No, it is not a tax, but an estimated payment (withholding) toward any income tax liability that the seller may have as a result of capital gain.
Why would the nonresident seller pay tax to Maryland on capital gains?
Because any income realized from the sale is Maryland income, regardless of where the seller lives. Income from the sale of Maryland real property is Maryland income and must be reported to Maryland.
Who qualifies for an exemption?
Almost anyone will qualify for at least a partial exemption, but they must apply before closing. There are special situations that apply as well. One exemption is if the seller’s home qualifies as a principal residence under federal law. The nonresident seller may apply once the property is under contract and at least 21 days before closing. The earlier the seller is aware of this requirement, the better it is so that they may complete the application and gather information necessary to apply. Some of the basic information needed is proof of original purchase price or inherited value and proof of the contract sales price.
The application for an exemption, MW506AE, may be found on www.marylandtaxes.com and questions can be emailed to nrshelp@comp.state.md.us.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
