Saturday, August 28, 2010

Maryland's Tax Withholding Requirements

As you probably know, the state of Maryland imposes upon a nonresident seller a 7.5% income tax withholding at the time of settlement. This 7.5% is applied to:

the total sales price paid to the transferor less: (1) debts of the transferor secured by a mortgage or other lien on the property being transferred that are being paid upon the sale or exchange of the property; and (2) other expenses of the transferor arising out of the sale or exchange of the property and disclosed on a settlement statement prepared in connection with the sale or exchange.

In order for a seller to claim exemption from Maryland withholding, the seller must either be a resident of Maryland or the property sold must be the “principal residence” of the seller. For a property to qualify as the seller’s principal residence, it must meet both the IRS definition (IRC 121) and it must be indicated on the SDAT records as being the assessed owner’s “principal residence.” Sellers have typically signed a "Certificate of Exemption" which accompanied the deed to be recorded at the County, or language was built into the deed containing this certifying language.

I know all of this information. So what has changed?

An earlier version of the “Certificate of Exemption” form did not include the requirement that the property be indicated as the principal residence on SDAT records. The Assistant Attorney General for the Courts and Judicial Affairs Unit, Stuart Cordish, has requested title insurance companies and agents make sure we use the correct “Certificate of Exemption from Withholding” form at closings. Because they are seeing a greater number of sales by nonresident sellers involving properties that are claimed as principal residences but are not listed as owner-occupied by SDAT, they are also considering asking the Clerks to reject deeds whose affidavits do not contain the current language.

Each title company must make sure the correct form is filed (see here, page 28), and that they have checked to ensure the property is owner-occupied on SDAT to ensure the recordings are not rejected.