Navigating Maryland's Non-Resident Withholding Tax

In Maryland, the landscape of non-resident withholding tax has undergone a notable change, with the rate increasing to 8.75%. This adjustment has significant implications for individuals selling property in the state, especially those who are not residents. In this blog post, we will break down what this tax means for sellers, how it is calculated, and the steps you can take to potentially reduce your tax liability.

Understanding the Tax Rate:

The non-resident withholding tax in Maryland has been raised from 8% to 8.75% for individual sellers, a change that took effect on January 1, 2026. On the other hand, the rate for entities such as LLCs and corporations remains unchanged at 8.25%. This increase aims to encourage non-resident sellers to file their Maryland tax returns promptly. The withholding tax is applied to the total payment made to the seller at the time of closing, which is then held until the seller files a Maryland tax return to determine their actual tax liability.

Calculating the Total Payment to Seller:

To understand how much tax will be withheld, it's essential to know how the total payment to the seller is calculated. The formula is simple: take the sales price of the property, subtract any commissions, transfer taxes, costs of sale, and any existing liens or mortgages. The remainder is considered the total payment to the seller, which is then multiplied by the new withholding rate of 8.75%. For example, if a property sells for $500,000, and after deducting applicable costs, the total payment to the seller is $450,000, the withholding tax would be $39,375.

Exemptions and Reducing Tax Liability:

Sellers have options to minimize their withholding tax through exemptions. Non-resident sellers can apply for a partial or full exemption with the Maryland Comptroller's office. To do this, sellers must complete a state form detailing their property’s acquisition cost, including the original purchase price and any improvements made. These details are crucial for determining an accurate tax liability rather than relying on an estimated one. If, for example, a seller originally bought a property for $300,000 and invested $50,000 in improvements, their adjusted basis would be higher, potentially leading to a lower tax withholding.

Documentation Required:

When applying for an exemption, sellers must provide specific documentation to the Comptroller’s office. This includes the original settlement sheet showing the purchase price and closing costs, receipts for any improvements made, and the current settlement sheet detailing the sale's expenses. The adjusted basis, calculated by subtracting any depreciation from the original purchase price and adding any improvements, will determine the final withholding amount. For instance, if the adjusted basis is found to be $350,000 and the selling price after deductions is $450,000, the delta taxed would be $8,750.

Conclusion:

Navigating the non-resident withholding tax in Maryland can be complex, but understanding the basics can help sellers manage their obligations effectively. With the new rate in place, it is crucial for non-resident sellers to be proactive in understanding their potential tax liabilities and exploring exemption options. Key takeaways include the importance of accurate documentation and the potential for reducing tax liability through proper filing and application for exemptions. Remember, the guidance of a knowledgeable real estate professional can make this process smoother and more efficient.

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