Understanding and Navigating the Maryland Non-Resident Withholding Tax

Are you selling a home in Maryland? Did you know there is a Non-Resident Withholding Tax? We never want surprises so we make sure our clients are prepared from the beginning but we often hear many sellers are unaware of the Maryland Non-Resident Withholding Tax. It can complicate the selling experience if not addressed early. 

To help clarify this topic, we've compiled answers to some common questions. 

What is Real Estate-Related Withholding Tax?
Maryland Non-Resident Withholding Tax is an income tax paid to the State of Maryland on the total sale price when the seller is not a Maryland resident.

What is the Most Common Mistake Regarding Withholding Tax?
The most common mistake is not submitting the exemption application on time. The Maryland Comptroller’s office requires at least 21 days to process exemption applications, and delaying this step can result in complications or even default under the terms of the Contract of Sale.  Click here for the form and complete ASAP! The 21 days is really important if you are looking for a full or partial exemption!

How is the Withholding Tax Calculated?
The tax is calculated by subtracting sale-related expenses (such as loan payoffs, prorations, and commissions) from the gross sale price. The net proceeds are then multiplied by a percentage—8% for individuals and 8.25% for business entities—to determine the tax owed.

Why is the Tax Collected at Settlement?
The tax must be paid at settlement to allow the title company to record the deed with Land Records. The deed cannot be recorded, and the title will not transferred if one of these is not met:

• An Affidavit of Residence certifying exemption criteria are met,
• A Certificate of Full or Partial Exemption, or
• Payment of the tax with a Report of the Withholding Amount paid. 

What if I Believe the Full Tax Amount Isn’t Owed?
Sellers can apply for a full or partial exemption from the tax. The application, available on the Comptroller of Maryland’s website, must be submitted at least 21 days before settlement, accompanied by supporting documentation for the state to assess the actual tax owed.

Click here for the form and complete ASAP! The 21 days is really important!

Can I Reclaim Part of the Tax After Settlement?
Yes! Sellers can file a Maryland form MW506R (Application for Tentative Refund of Withholding on Sales of Real Property by Non-Residents) for settlements or it’s part of your Maryland State Tax Return is necessary to claim any overpayment.  

We strive to ensure our clients are well-informed and prepared for every step of their real estate journey. If you have any questions or need further assistance, we are here to help guide you through the process.

Click here for information from the state of Maryland. We hope this helps!