DID YOU KNOW that there have been recent changes made to the Maryland income tax laws and regulations which affect
nonresident sales of real property?
1. Effective January 1, 2008, the tax rates that apply to withholding on a sale or transfer of real property are 6.75% for a nonresident individual, and 8.25% for a nonresident entity.
2. A nonresident entity which qualifies or registers to do businessin Maryland, or is formed in Maryland, less than 90 days before the settlement date is still considered a nonresident entity for purposesof withholding.
3. Form MW506R, the Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents, must be filed no later than November 1st of the calendar year in which the nonresident withholding was paid.
4. The Affidavit of Residence or Principal Residence form, signed by all sellers at settlement and recorded with the deed, has changed.
The last item will have the most impact on the settlement process. On the affidavit, in the block captioned Reasons for Exemption, the paragraph to be checked by the seller marked Principal Residence now reads as follows (the bold portion is new):
Although I am no longer a resident of the State of Maryland, the Property is my principal residence as defined in IRC Section 121 and has been recorded as such with the State Department of Assessments and Taxation.
Now, when a seller checks the Principal Residence box, it does not guarantee an exemption from withholding; the records of SDAT must also be checked as a requirement of this exemption. If those records indicate that the property is not the seller’s principal residence, the tax must be withheld at closing or an application for an exemption must be filed, and an exemption granted. If the seller’s property qualifies as principal residence under IRC Section 121, meaning he has resided in it for 2 of the past 5 years, the tax may still have to be withheld.
In the event the seller checks the first box in the Resident Status block, indicating that he is a resident, no withholding is necessary even if SDAT records indicate that the property is not the seller’s principal residence. Maryland Code defines “Resident” as an individual who (a) is domiciled in Maryland on the last day of the taxable year; or (b) for more than 6 months of the taxable year, maintained a place of abode in Maryland, whether domiciled in Maryland or not; or (c) is domiciled in Maryland and moves outside Maryland before the last day of the taxable year with the bona fide intention to remain permanently outside the State. So long as the seller meets one of those requirements, the residency box can be checked.