MD Withholding Tax Info

Since October 1, 2003, the State of Maryland has required title companies to collect for income tax withholding on sales or transfers of real property by nonresident individuals and nonresident entities.  As of June 1, 2012, the “Non-resident withholding tax” rate has increased. The increase has changed from 6.75% to 7.0% for individuals. It remains at 8.25% for corporations.

Even though this has been in effect since 2003, the question still comes up at the settlement table as to who is exempt from this withholding requirement.  Basically, the seller must be a resident of the state of Maryland in order to be exempt from the withholding requirement.  However, what if your seller was a Maryland resident who relocated to another state and buys another residence? Does his Maryland residence cease to be his principal residence for purposes of collecting the Maryland nonresident real estate withholding tax?

In order to clarify who is considered to be a resident of the state of Maryland, the following exemption must be followed:

‘A certification under penalties of perjury that the property being transferred is the transferor’s principal residence, as determined under the Internal Revenue Code, is provided by each transferor in the recitals or acknowledgement of the deed or other instrument of transfer or in an affidavit signed by the transferor or agent of the transferor that accompanies and is recorded with the deed or other instrument of transfer.’

So if you have a seller that fits the same criteria outlined for 1099 purposes, this also satisfies the condition for the withholding exemption.  If your seller lived in the property for at least 2 consecutive years out of the last 5 years, then this was still considered their principal residence as defined in IRC § 121 and is recorded as such with the State Department of Assessments and Taxation. This statement is listed under Section #2 – Reasons for Exemption - on the “Certification of Exemption from Withholding Upon Disposition of Maryland Real Estate Affidavit of Residence or Principal Residence” which is attached to our deeds and sent along with the Deed to be recorded after settlement.

However, be aware that military personnel selling a home in Maryland, even if they have lived in that home but are actually a resident of another state and file their income tax returns in another state, ARE subject to the withholding requirements at the time of the closing unless they have filed for an exemption and are able to produce the Exemption Certificate prior to settlement. Under certain circumstance, military personell can be exempt for an extended period of time, but they must file for the exemption.

If your seller is a nonresident individual or entity, and believes that they are eligible for an exemption from this Real Estate withholding requirement, they may file an Application for a Certificate of Full or Partial Exemption (MW506AE) with the Comptroller no later than 21 days before the date of closing.  The 21 day time period is a minimum required to permit the Comptroller to review the application and, if appropriate, issue a certificate before the date of closing, however, the 21 days does not guarantee that a certificate will be issued before the date of closing.  It is advisable to file in a time period greater than 21 days! 

Additional information may be obtained by calling 1-800-MDTAXES (1-800-638-2937), or on the Comptroller’s Web site by clicking clicking here.