Tips on Non-Resident Income Tax Withholding

Real estate professionals as well as homeowners often find that the double-negative verbiage on government websites can be problematic when trying to really understand things like withholdings on the sale of real estate. Paul Koch of Stewart Title here in Frederick was kind enough to give us some highlights on the 7.5% income tax withholding in Maryland for individual non-residents on the sale of their home (8.25% for entities).

Q. So tell us the basic information on this tax on the sale of real property in Maryland by non-residents.

A. Keep in mind, this is not really a “tax”, but rather a withholding payment taken at the time of settlement. The funds are held as an estimated payment on the home seller’s behalf to cover any taxes they might owe after filing their next tax return, in case of any gain made on the sale of the home.

Q. How is the amount that they owe figured? Do they pay on the entire sales price?

A. No, not on the entire sales price. The “total payment” on which the 7.5% is computed is basically this:

Total Sales Price
– less debts of mortgage(s) and/or liens
– less the expenses of selling the property

Q. What is the threshold to meet to be a resident?

A. As most people know, the homeowner must actually live in the home 2 out of the last 5 years…any 2 of the last 5 years. What many may not realize is that their tax return for those two years has to be from the home address.

Q. Are there any other nuances that agents may not be aware of?

A. If a homeowner is exempt and can verify it, then they need to fill out MD Form MW506E, and it MUST be filed NO LATER than 21 days before the date of settlement.

Q. Are there any other forms we should know about?

A. If the amount withheld is more than what is due, the seller has 60 days to file MD Form MW506R to get a chance to recoup their money earlier….that is, unless the settlement takes place on or after October 1st. Then they must wait until they file their taxes in the next year.

Q. Thanks very much for the information, Paul. Can you direct agents to some resources that they can provide for their seller clients to find out what they need to know about the Maryland non-resident withholding?

A. As Realtors know, they are neither attorney’s nor tax advisers, so it’s always best to direct sellers to their tax adviser, accountant, or to their CPA. Any title attorney will be happy to supply forms ahead of time to a seller, so they can get an idea of what information they’ll need to supply.  MD Form 506NRS is the form they will fill out. Also, a call to the Maryland Comptroller will get them in touch with a person who can answer their questions.

A big thanks to Paul Koch, Settlement Officer and Business Developer of Stewart Title of Frederick. If you’d like more information about the non-resident income tax withholding, Paul can be reached at paul.koch@stewart.com, or (240) 397-7941.

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