Anyone who sells a property in Maryland, but is a “non-resident” of the state of Maryland, must pay a withholding tax. Recently the Maryland Association of Realtors released information on various aspects of this law as presented by the Office of the Comptroller of Maryland, Revenue Administration Division.
The law has been in place for more than 10 years, with two rates in place. In 2020, the withholding amount changed to 8% for individuals and trusts. The rate for business entities stayed at 8.25%.
Simply put, a non-resident is a person who resides in another state or country. But the Comptroller’s office explains, “If you have an individual client who has lived in Maryland and was a Maryland resident, they will be a resident until they establish residency in another state.”
A list of common misconceptions was provided as follows:
Is it a tax?
No, it is not a tax, but an estimated payment (withholding) toward any income tax liability that the seller may have as a result of capital gain. Currently, the rate of withholding is 7.5%.
Why would the nonresident seller pay tax to Maryland on capital gains?
Because any income realized from the sale is Maryland income, regardless of where the seller lives. Income from the sale of Maryland real property is Maryland income and must be reported to Maryland.
Who qualifies for an exemption?
Almost anyone will qualify for at least a partial exemption, but they must apply before closing. There are special situations that apply as well. One exemption is if the seller’s home qualifies as a principal residence under federal law. The nonresident seller may apply once the property is under contract but must be at least 21 days before closing. The earlier the seller is aware of this requirement, the better it is so that they may find the application and gather information necessary to apply.
The application for an exemption, MW506AE, may be found on www.marylandtaxes.com and questions can be emailed to nrshelp@comp.state.md.us.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
