MD Nonresident Property Owner Withholding- Ocean City, MD
How much money will be withheld when I sell my house in Maryland?
That is a question every MD Nonresident property owner should ask themselves prior to selling. Why? It’s the Law and there’s no way around it.
Almost 16 years ago, October 1, 2003, Section 10-912 was passed by the general assembly and placed into effect. Section 10-912 addressed the sale or transfers of real property and associated tangible property in Maryland by nonresidents AND nonresident entities. This law is still as relevant today as it was when it was passed in 2003.
The withholding of monies is for potential taxes that may be due from the sale of your property. The collection of the monies at settlement, act as collateral to ensure that the nonresident seller files a tax return with the state at the end of the tax year. Before the transfer of a deed, by a nonresident individual or nonresident entity, a payment must be made to the Clerk of Court (title/closing agent handles payment). “In the case of a nonresident individual, the payment is 7.5% of the total property sale payment made to the individual. A nonresident entity must make an 8.25% payment.”
How do they decide the amount to withhold?
Your withholding is based on the “net” proceeds from the sale. “Net proceeds” equal the sales price minus any mortgage or lien payoffs, other related expenses such as real estate commissions, transfer and recordation fees, etc. Remember, this is a withholding and is based on your final tax return. If no tax was due from the sale, you will be refunded the full amount withheld by Maryland. However, you don’t have to wait until the normal tax time to file for a refund or even an exemption.
When can I file for the refund?
If you or your accountant are confident that the monies withheld at settlement are in excess of the income due on the sale of your property, you can file for a refund sixty days after payment. This method differs for properties closing after the date of November 1st. After November 1st, you would simply request a refund on the income tax return filed to report the sale.
Maybe you are exempt?
There are several exemptions to the withholding requirement and Form MW506AE has them all listed (Link to Witholding Forms). The most frequently used exemption is; seller is receiving zero proceeds from this transaction.
Do you fit zero proceeds?
Quick example… You purchased an oceanfront condo in Ocean City, MD for personal use at the sales price of $800,000 and you paid cash (no loan). Fast forward 10 years and you’re ready to sell. Your condo is under contract for $861,000. After commissions and other acceptable deductions your “net” proceeds will amount to $800,000. Wow, the closing agent will have to withhold 7.5% of $800,000 equaling a withholding of $60,000 at settlement. This is a situation where filing for an exemption and proving that the original purchase price and current sales price would not yield a taxable event. There was no “gain” on the sale of the property, therefore no withholding.
When Do I file for the Exemption?
You or your accountant can file Form MW506AE requesting a full or partial exemption. The Form MW506AE must be received by the Comptroller of Maryland no later than 21 days before the closing date. 21 Days is the magic number. I recommend filing as early as possible.
On numerous transactions I have had clients receive a partial or full exemption prior to closing. The key is being informed and prepared!
This blog is for informational purposes only. I am NOT a lawyer or an accountant. Nor am I giving you legal or financial advice. As a service to my clients, I always refer them to the proper professional.