New tax law affects property sold by nonresidents


When nonresidents sell real property in Maryland, they are supposed to pay income tax on capital gains realized on the sale.

A new law that goes into effect Wednesday requires that a percentage of the net proceeds of the sale (total payment) be withheld from the funds received by the nonresident and paid to the clerk of court. The withheld amounts will be 4.75 percent for individuals and 7 percent for entities.

The new law enforces collection of the tax from nonresidents by requiring every deed to include a statement of the seller's total payment. It also requires a certification by a seller who claims exemption from the withholding tax because the seller is a Maryland resident; because the property sold is the seller's principal residence; or because the seller has obtained a certificate of full or partial exemption from the comptroller's office.

If a seller claims an exemption because the property is his principal residence, the seller must have lived there for at least two years during the past five years.

Many settlement lawyers predict that the new requirements will likely double the size of every deed, increase closing costs and result in court clerks refusing to record deeds because of minor deficiencies in complying with the law's technical requirements.

For example, the new law requires a deed recital or seller's affidavit of the total payment generated by the sale. Calculating total payment involves a series of charges to the seller's net sale proceeds, including adding any secured debt incurred during the 120-day period before the date of the deed.

Major title insurers have advised their agents that they are justified in charging sellers for additional time spent in calculating the total payment figure, which the law requires to be inserted in all deeds.

Another problem area could be tax-free exchanges and installment sales by nonresidents. Unless the nonresident seller has obtained an exemption from the comptroller's office, tax must be withheld based on the value of property received during the transfer.

Under draft regulations, there are 14 possible grounds for obtaining a certificate of exemption from the comptroller, including tax-free exchanges and installment sales. The seller is required to file an application with the comptroller at least 21 days before the settlement date. If the comptroller does not supply the exemption certificate by the settlement date, tax will be withheld from (or paid by) the seller.

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