To join in on this discussion, you must first log in.

Discussion:Maryland non-resident withholding on sale of home

From TaxAlmanac, A Free Online Resource for Tax Professionals
Note: You are using this website at your own risk, subject to our Disclaimer and Website Use and Contribution Terms.

From TaxAlmanac

Jump to: navigation, search

Discussion Forum Index --> Tax Questions --> Maryland non-resident withholding on sale of home


Heirapparent (talk|edits) said:

7 April 2007
Client whose primary resident is in DC is about to sell his weekend home in Maryland. When non-residents sell property in Maryland, the state presumes that the entire sale price is taxable gain and requires 6% of the gross sale price to be withheld on closing. The one exception to this requirement is if the non-resident seller has obtained an exeption certificate from the state recognizing that the seller has some cost basis in the home and instructing the settlement agent that the 6% can be charged against an amount smaller than the full sales price.

The non-resident may obtain such an exemption certificate by filing Form MW506AE Application for a Certificate of Full or Partial Exemption. When determining how much cost basis will be taken into account for purposes of this exemption, the state will only take into account receipts that show both the name of the property owner and the address of the property being sold, photocopies of which must be attached to the exemption request form. So, for example, the cost of fixtures purchased by the homeowner at a retail store (no address, sometimes no name) or which show the seller's DC mailing address (rather than the address in Maryland), would not be recognizable for purposes of the exemption. When the seller files his US and Maryland income tax returns next year, however, such costs would be recognizable and reduce his ultimate tax liability.

Maryland also has a tentative refund process that enables a non-resident to request a refund of any amount that was withheld at the closing that exceeds the amount of taxes he acutally will owe. The refund may be obtained by filing form MW506R within 120 days of the sale. (If the seller's final income tax return for the year of the sale shows that the refund was excessive, the seller would have to repay the taxes with the final return; hence the "tentative" qualifier). The instructions for the MW506R refund form indicate that supporting documentation showing the purchase price and improvement costs will be required, but it does not state that the documentation must meet the same strict requirements of the exemption form application. The instructions also do not say whether copies of the receipts themselves must be submitted with the MW506R.

I'd like feedback on my assessment of this situation:

1. I don't see anything that says he cannot file both requests, first to reduce the amount withheld at closing and then to get a refund for taxes on costs that are a legitimate part of his basis in the house but that don't meet the requirements for the exemption application. So, he could get an exemption now for the purchase price of the house and the major renovation contracts, and then get a refund of the 6% charged on things like the new faucets that he bought at Lowes next month (without waiting until he files his 2007 MD non-resident income tax return in 2008).

2. I am assuming that copies of receipts do need to be attached to the Refund request, even though the instructions aren't clear.

3. I am assuming that the standard for the Refund receipts would not be as high as the standard for the Exemption receipts (i.e., no requirement that they have the MD address on them).

Does anyone have experience with this process?

thanks for any advice you can offer.

Laticiaw (talk|edits) said:

7 April 2007
Sorry, only thing I sold in Maryland last year in the real estate line had to do with me being a resident of the wonderful state of MD...

Heirapparent (talk|edits) said:

8 April 2007
Has anyone filed a return in MD for a resident's sale of a home? They don't require the seller to submit receipts for each cost showing seller's name, property address, etc in order to prove the basis claimed on his annual income tax return do they?

Taocpa (talk|edits) said:

9 April 2007
Okay, as a MD resident, I really can only answer the last question. No, the documentation is not required for a MD resident's sale of a home.

Suggestion as to the other - I will post some of this to a MD tax listserv I am on and see if I can get an answer for you.

Tom

Heirapparent (talk|edits) said:

9 April 2007
thank you very much, I appreciate the extra help

Heirapparent (talk|edits) said:

9 April 2007
I was finally able to reach someone in the MD Comptroller's office who could answer the questions for me. This is what I was told:

Both the exemption and the refund forms can be filed.

The same documentation must be submitted for both forms. For capital improvements, that means receipts with the seller's name, the address of the property being sold AND a description of the improvement.

When the final MD505 return is filed, the seller would show gain equal to the gain reported with respect to the sale on his federal 1040 and Maryland will refund any remaining excess (receipts need to be kept by the seller, but don't need to be submitted to MD and don't need to show all the details that would have been required for the exemption or tentative refund).

Taocpa (talk|edits) said:

9 April 2007
Glad you got an answer. My listserv friends haven't answered. That doesn't mean a darn thing as sometimes they don't answer questions. I don't know why, but they just don't sometimes.

It also makes sense that they need the capital improvement receipts. Having sold real estate in MD in another life, people never keep this stuff and just say, "I bought carpet in 1988 and spent $2000." Yet they have no proof and you could conceivably make that stuff up all day long.

Good luck.

Laticiaw (talk|edits) said:

9 April 2007
I sold my house in Maryland and didn't have to file anything like he was talking about...of course I was no where near the maximum of my Cap Gains exclusion either...

Taocpa (talk|edits) said:

9 April 2007
Laticlaw,

None of this applies if you are a MD resident. It's only for non-residents.

But knowing MD and what they are trying to do, I wouldn't be shocked MD residents have to start paying CG tax on sale of the home. There is no plan to do this, but our state legislators are so wonderful. They steal from whomever they want to.

Laticiaw (talk|edits) said:

9 April 2007
I know Maryland, and get scared everytime they go in session...it just seems like they are looking for more and more ways to pick my pocket...I am only a half a mile from the DE state line and am VERY tempted to move within the next few years...

Laticiaw (talk|edits) said:

10 April 2007
And guess what? Just had a client call us up and is in this situation right now!!! My boss was at a loss and I could tell him that I had heard of it and knew which forms to look up at least...Thank you!!!

Laticiaw (talk|edits) said:

10 April 2007
Heir -- if you need a phone number for the comptroller's office on who to talk to, I got one...let me know. Again, going through it now with one of MY clients and this posting made me aware...

Taocpa (talk|edits) said:

10 April 2007
Here is something I received from a gentleman whom, if I am not mistaken, used to be a higher up at the MD Comptroller's office:

I was asked if I would respond to your question. Because of the “items” that the Comptroller has received, they have taken somewhat of a hard line on this issue. The intent of the statute was to collect the tax from the nonresidents while the “money” was still in the State. Compliance from nonresident sales of real estate was comparatively low and collecting tax from a nonresident is more difficult than you might imagine; albeit, the reciprocal agreements Maryland now has with other jurisdictions makes it much easier.

The person (Millie Stevens) who processes the MW506AEs is very knowledgeable and has been administering these forms almost since its inception. It is my recommendation that you provide copies of all of the receipts with the MW506AE regardless of the address on the receipt, but with a notation that the items purchased were for the Maryland property. Make sure you do not include in the basis calculation such items as tools, items for use elsewhere, and other items that would not go into the basis calculation. This shows that the basis is not being over-inflated – seems to go without saying, but you should see some of the stuff that has been submitted.

If you are not satisfied with the determination, you can speak with Millie or her supervisor. They may ask for additional information or support, and in some cases will make adjustments, but it doesn’t make much sense to put up too much of a fight at this level. The downside to the collection of tax at settlement is that the taxpayer is without the use of these funds until the return is filed to request the refund. Because the decision is non-appealable, take the amount that you are allowed and make sure that the certificate is provided to the settlement officer so that they know how much tax to withhold at settlement, if any. The MW506NRS will be completed by the settlement officer (or person responsible for closing) and a copy of that form will be provided to the taxpayer and a copy will go to the Clerk of the Court with the payment of the tax. It is forwarded to the Comptroller’s office for processing. The payment is actually applied to the taxpayer’s account the same as an estimated tax payment.

Although you can then file an MW506R, Application for Tentative Refund, I would suggest that you just file the Maryland income tax return once the federal return is prepared. The Comptroller has already made a determination of the taxable gain on the sale when it considered the MW506AE and will probably not make any further adjustments until the actual return is filed.

Complete the federal return, calculating the gain based on the basis determined for federal purposes. This gain, if any, will then be reported on the Maryland Form 505, Nonresident income tax return. Be sure to report any tax withheld and reported on the MW506NRS on the proper line of the tax return. It is reported on line 44 of the 2006 return, but you will need to verify the correct line for 2007.

Laticiaw (talk|edits) said:

10 April 2007
Yeah, I'm waiting on a call from Millie right now. My situation differs a little because the home for sale was the priniple residence while the clients were in the state of Maryland...they didn't move until January but the sale of the house is not going through until May...so client is panicking, but this thread was helpful because I at least had an idea where to start looking, which is something my boss had not clue about...

Aa1123 (talk|edits) said:

13 March 2014
I know this thread is old, however, in the interest of streamlining the number of new discussions I thought I'd post my question here. Anyone had any experience, good or bad, applying for the exemption for non-resident sales of property? Client owns a rental in MD, resides in CO. We plan to file for a for exemption to 7% withholding requirement. He has owned the property since 2008. Has made improvements over the years, the majority recent, some when he first purchased the property. From what I understand the Comptroller's office requires proof of improvements in the form of paid invoices, receipts and cancelled checks. One issue is the cancelled checks as most recent impovements were paid electronically. I should be able to support those with electronic confirmations for recent transactions. Not sure what documentation he will be able to obtain from the 2008 invoices.

Appreciate any guidance or experience any of you wish to share. Thanks!!

To join in on this discussion, you must first log in.
Personal tools