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Maryland General Assembly Increase the Maryland Withholding Rate for Sale of Property by a Nonresident
By: Vanessa Carlo-Miranda, Esq
Section 10-912 of the Tax-General Article, Annotated Code of Maryland states that income tax must be withhold on sales or transfers of real property and associated tangible personal property in Maryland by nonresident individuals and nonresident entities. Until recently, the tax rate for nonresident individuals was 4.75% and 7% for nonresident entities. The Maryland General Assembly, however, changed the tax rate for nonresident individual from 4.75% to 6% effective July 1, 2005. This new tax rate is the result of a formula where the new withholding amount is equal to the sum of the rate of the tax imposed under Md. Code Ann., Tax-Gen. §10-106.1 (currently 1.25%) and the top marginal State income tax rate for individuals under Md. Code Ann., Tax-Gen. §140-105(a) (currently 4.75%). The tax rate for nonresident entities remains at 7%.
What does this mean for a nonresident individual selling a Maryland property? When a settlement is conducted for a Maryland property the title company will fill out a form that allows it to calculate the amount necessary to be collected from the seller in order to record the transaction. The title company will make a payment for the nonresident to the Clerk of the circuit court in the county where the property in located. Without this payment the transaction will not be accepted by the court. The state of Maryland does not consider this payment as a separate Maryland tax, instead, they consider it to be part of the “pay as you go” method of tax collection. This payment, however, does not affect the requirement for the nonresident individual to timely file the appropriate Maryland income tax return for the year of the sale or transfer. (See Maryland Income Tax Alert for June 2005).
While most agents are aware of Maryland’s withholding tax, they may not be aware that a nonresident individual or entity may apply for a certificate of full or partial exemption from the withholding tax. The certificate must be obtained prior to settlement and the original must be presented to the title company that will be conducting the closing for said property. Generally, the state of Maryland recognizes several exemptions. Some of the most common exemption are when the sale is part of a tax-free exchange for purposes of IRC §1031; the transfer is between spouses or incident to divorce for purposes of IRC § 1041; and transfer is by a tax-exempt entity for purposes of IRC §501(a) and transfer involves limited or no unrelated business taxable income under IRC §512.
A nonresident individual or entity may also apply for reimbursement of the withholding tax paid at closing after settlement. In order to do so, the nonresident individual or entity must fill out a form for full or partial refund. In the event that the sale is incident to a 1031 Exchange, however, the nonresident individual should consult the Qualified Intermediary (QI) as to how to proceed with the request for refund. Receipt of the refund by the seller may jeopardize the 1031 Exchange. While most aspects of the 1031 Exchange is handled by the QI, many sellers use out of state companies that may not be familiar with the Maryland nonresident withholding tax. It is for this reason that it is advisable that listing agents become familiar with this process and make sellers aware of the need to apply for a certificate of exemption prior to closing. For additional information, you may contact taxhelp@comp.state.md.us or call 410-260-7980 from Central Maryland or 1-800 MD TAXES (1-800-638-2937) from elsewhere. |
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