What is the Non-resident Withholding Tax When You Sell

When you’re going to sell your second home or investment property here in Ocean City, Maryland, Fenwick Island, Delaware or anywhere in these states for that matter, you’ll want to be aware of the non-resident withholding tax that you need to navigate if you primarily live in another state other than your property that is being sold.

What is this secret withholding tax you say?

This is not an “Exit Tax” like some states have when you leave but a way for Maryland and Delaware to capture tax revenue from proceeds earned of a property that is sold and transferred in that state at the time of settlement when the seller does not primarily live in the same state. If you do live in the same state, this doesn’t apply to you. The settlement company or attorney handling the transaction is required to collect the calculated tax from the proceeds at settlement to pay the local Clerk of Circuit Court or State Department of Assessments and Taxation to hold if the seller does not produce a certificate of exemption.

Maryland’s form is called MW506NRS and Delaware’s form is called 5403.

There are full and partial exemptions that you may qualify for and I will lay it out in this post. You’ll also want to consult with your accountant or tax attorney to properly fill out the forms.

I can send over the proper forms to help guide you through the process and help to get it rolling to have a smooth settlement.

A request for full or partial exemption from the tax needs to be submitted to the Comptroller of Maryland 21 days before closing to be eligible once you have a ratified contract on your property which usually gives plenty of time.

If nothing is filed as stated above, then the settlement company will collect the full amount from your proceeds. You are allowed to file the exemption after the settlement has transacted but you will need to wait 60 days before doing so.

Delaware’s process is a little bit different as they require form 5403 to be submitted before settlement or the settlement won’t happen at all.

What are the Non-Resident withholding tax rates?

Maryland and Delaware’s non-resident tax withholding rates are the following as of January 2022.

8% for individuals and 8.25% for any type of business for Maryland

6.6% for individuals/other entities and C-Corps are 8.7% for Delaware

Let’s look at a quick partial exemption example with a 2nd home property that is sold for $500,000 in Ocean City, Maryland by an individual seller who lives in Pittsburg, Pennsylvania.

They bought it for $300,000 a few years back and currently owe 100,000 on the mortgage. To keep it simple we’ll leave out any closing costs so at the day of settlement, the sellers realize $400,000 of proceeds from the sale.

No request was filed to the Maryland Comptroller and Mr. Seller will see on the settlement statement that the 8% non-resident withholding tax was calculated off of the total proceeds ( $400,000 x .08= $32,000 withheld)

Mr. Seller applies for the later partial exemption request after waiting the required 60 days to get a refund of $16,000 from the State of Maryland. Actually paid $300,000- $500,000 sales price =$200,000 real proceeds x 8%= $16,000 tax. Just that little tweak cuts that tax in half as Mr. Seller had a lot less mortgage owed on the property than what they paid for it.

Mr. Seller could of done this from the get go when going under contract to avoid the wait time and to receive the reduced tax amount the day of settlement if they wanted this sooner. Most clients that I’ve worked with are using a 1031 tax deferred exchange to roll any proceeds into another property in the area that gives a better return or suits their needs better like an extra bedroom or direct ocean front.

Also, you can deduct your closing costs from when you purchased, closing costs on your current sale and any improvements that may of been made while owning the property to further reduce the amount owed. You’ll need to provide any paid invoices and receipts.

What are the full exemptions in this scenario example?

Seller or Entity is a full time resident of Maryland
Sale is part of a 1031 tax deferred exchange
Property being transferred for $0
Property is being transferred to government

Property transferred because of foreclosure

The full exemptions and tax amounts could change or vary depending on law changes in Maryland or Delaware. Advising with your real estate professional in the beginning stages of listing your property will help you plan and know the current rates at that time.

Hope that helps and reach out if you need any help here by the the Maryland and Delaware beaches by booking best day and time for you on my Calendar here.