Maryland Nonresident Withholding Requirement
Nonresident taxpayers who sell property in the State of Maryland will have funds withheld for the payment of state income taxes.
When a nonresident of the State of Maryland sells Maryland real estate, they are required to make an income tax withholding payment to the state for Maryland income taxes on the sale of that property. Typically, this withholding requirement is enforced during the closing process. Settlement agents, such as title companies, are responsible for ensuring that appropriate funds are allocated for the payment before closing. The percentage that must be withheld can be found on the state’s website above.
The State of Maryland does recognize 1031 exchanges as tax-deferred. As a result, they offer an exemption to collecting this tax payment at closing. Taxpayers exchanging out of property in Maryland can file for the exemption on Form MW506AE. When completing the form, the taxpayer should check the box indicating that the sale is part of a 1031 exchange. In order to qualify, the form must be submitted with a letter from the Qualified Intermediary confirming that an exchange is taking place.
Every Qualified Intermediary helps clients with this process in a different way. Normally, we submit this form to the Maryland Comptroller on our clients’ behalf. We ask the client to fill out the form and send it to us, and we will submit the form with the required cover letter.
Currently the state law requires that the be submitted 21 days before the transfer of ownership of the property, so it is important to plan ahead to ensure that the form is filed on time.
The MD nonresident withholding law requires that a new deed may not be recorded unless the tax is paid to the Clerk of the County Circuit Court. No tax needs to be withheld if the nonresident seller or exchanger presents, at settlement, a Certificate of Full or Partial Exemption (Form MW506AE for 2019) issued by the Comptrollers Office. The Certificate will provide full exemption from withholding or provide the partial amount of tax to be withheld at settlement. To obtain an exemption certificate, nonresident exchangers must submit to the Comptroller of Maryland, twenty-one days in advance of settlement, Maryland Form MW506AE (Form MW506AE for 2019), Application for Certificate of Full or Partial Exemption. For 1031 exchangers the Comptrollers office also requires a cover letter from the qualified intermediary who has been hired to facilitate a 1031 exchange. The Comptroller’s Office will then issue the taxpayer their certificate.
If a nonresident taxpayer has income from a Maryland property (even if there is a net loss), they need to file a Maryland Form 505, Maryland Nonresidential Income Tax Return, annually. If the Form 505 has not been filed for previous years, the Comptroller’s office may reject the application for exemption as there is no Maryland record that the property was held for business or rental purposes to qualify for the IRC Section 1031 exemption. The settlement agent is then required to collect the percentage from the net proceeds due to the exchanger/seller and submit that amount to the Clerk of the Court. Most likely this amount will not be refunded before the exchanger settles on a replacement property, and may become taxable federal income.
If an individual or a corporation has paid withholding tax at settlement in excess of the amount owed, they may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents (Maryland Form MW506NRS). The request for refund may be filed with the Comptroller after 60 days have elapsed from the date the tax was paid to the Clerk of the Court or Department of Assessments and Taxation by the settlement agent.