Bulletin: MD2015006

Dear Associates:

MD Tax-General § 10-912 was enacted in 2003 to mandate income tax withholding on certain sales and transfers of Maryland real property.

An excellent publication that every Maryland title producer should have at his/her fingertips can be found at this link: http://forms.marylandtaxes.com/12_forms/withholding_requirement.pdf

I. Overview:

Whenever Maryland real property is owned by a nonresident individual or nonresident entity, and the property is sold or transferred, the deed or other document of transfer will not be accepted for recording by the Clerk of the Circuit Court (“Clerk”), nor may it be filed with the Maryland Department of Assessments and Taxation (“SDAT”), unless payment is made in the amount of 7% of the net proceeds of the transaction for an individual, or 8.25% for an entity.

The individual or company conducting the closing is responsible for ensuring that sufficient funds are withheld, and for paying the withheld funds to the Clerk or to SDAT. Payment must be accompanied by Form MW506NRS, found at this link: http://forms.marylandtaxes.com/14_forms/MW506NRS.pdf

II. Definition of Resident:

a. For Individuals:
The seller/transferor must provide a written certification, at closing, that the property is a principal residence. This can be stated in the deed or document of transfer, or in a separate document recorded with the same. Further, the property must be the principal residence of the seller/transferor for purposes of the I.R.S. Code, and it must be listed as a principal residence with SDAT. 

b. For Entities:
Resident entities must be formed under the laws of Maryland more than 90 days before the date of the sale of the property, or, if formed under the laws of another state, qualified by or registered with SDAT to do business in Maryland more than 90 days before the date the property is sold.

III. Required Amount to Collect:

Form MW506NRS explains how the withholding tax is calculated. First, the following amounts are deducted from the gross sales price of the property:

• Liens secured by mortgages/deeds of trust, or other liens that are being paid off at the closing; and
• Other expenses (including real estate commissions) arising out of the sale or exchange of the property, and disclosed on a settlement statement used at the closing.
• Note that elective amounts paid at a closing, e.g., credit card bills, etc., cannot be deducted from the gross sales price.

The resulting “net proceeds” amount is subject to the 7% or 8.25% calculation, in order to determine the required withholding amount. 

If there are multiple owners, a Form MW506NRS should be filled out for each non-resident owner, calculated upon their percentage of ownership interest in the property.

IV. How is the Withheld Amount Credited to the Taxpayer?

Keep in mind that the amounts paid to the Clerk or SDAT are for tax withholding only. They are not a final determination about the amount of taxes actually due, nor are they a determination that any taxes may be due at all.

Withheld funds are paid to the Clerk or SDAT in anticipation of the taxpayer filing an income tax return in the year following the closing. Generally speaking, the withheld amount is reported as an estimated payment on an income tax return.  

V. Other Exemptions:

MD Tax-General § 10-912 includes additional exemptions from any withholding requirement:

• The property is transferred pursuant to a foreclosure or a deed-in-lieu of foreclosure;
• The property is transferred by the United States, the State of Maryland, or a political subdivision of the State;
• The property is transferred pursuant to a deed or other instrument that includes a statement of zero consideration, as required by MD Tax-Property § 12-104; or
• A Form MW506E is issued by the MD Comptroller stating that:

a. No tax is due from the transferor in connection with the sale or exchange of property;

b. A reduced amount of tax is due in connection with the sale or exchange, and stating the reduced amount that should be collected by the Clerk or SDAT before recordation or filing. 

VI. Appealing a Decision to Withhold:

• If the property is no longer listed as the principal residence in SDAT, but is still being claimed as a principal residence by the seller/transferor, Form MW506AE may be filed at least 21 days prior to closing, in order to request an exemption from withholding. See: http://forms.marylandtaxes.com/14_forms/MW506AE.pdf
  
  If the amount paid to the Clerk or SDAT exceeds the amount of income tax due, Form MW506R, Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents, may be filed in the year the withholding payment was made.  This must be filed within 60 days after the date the tax is paid to the Clerk or to SDAT, but not if the transfer or closing occurs after November 1 of that year. http://forms.marylandtaxes.com/14_forms/MW506R.pdf
  
  If zero taxes are due, or a reduced tax is due in connection with the sale or exchange of property, Form MW506AE may be filed with the Comptroller at least 21 days prior to closing. See: http://forms.marylandtaxes.com/14_forms/MW506AE.pdf. If approved, the Comptroller will issue a Certificate of Full or Partial Exemption (Form MW506E).
• If seller/transferor is engaging in an I.R.S. §1031 tax-free exchange, Form MW506AE may be filed at least 21 days prior to the closing, in order to obtain a Certificate of Full or Partial Exemption (Form MW506E).

VII: Practice Tips:

In order to prevent surprises at closing and any negative consequences which may result from this, you should take the following steps upon receipt of any new transaction to sell or transfer Maryland real property:

1. If the property is not listed as the seller/transferor’s principal residence on SDAT, and the seller/transferor wishes to claim the property as their principal residence for tax purposes, have the seller/transferor file Form MW506AE at least 21 days prior to closing with the MD Comptroller.
    
2. If zero taxes are due from the sale/transfer (i.e., there is no expected capital gain on the sale of the property), have the seller/transferor file Form MW506AE at least 21 days prior to closing with the MD Comptroller.
    
3. If the seller/transferor is engaging in an I.R.S. §1031 tax-free exchange, have the seller/transferor file Form MW506AE at least 21 days prior to closing with the MD Comptroller.

In all of these cases, if the seller/transferor can provide a Form MW506E from the Comptroller at the time of closing, the transaction will be exempt from withholding.

      4. If the seller/transferor is considered a Maryland resident under Section II, above, or meets another exemption in Section V, above, no withholding is required.

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