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Non-Resident Owners of Maryland Property - Transfer Tax (Withholding) Rate Increase

Maryland increased its Non-Resident real property transfer withholding tax, effective January 1, 2008, from 6% to 6.75 % for individuals and from 7 % to 8.25 % for corporations. If you own real estate in Maryland but you are not a Maryland resident when you sell it you are subject to this tax. There are some ways around this tax but they are few and far between. I sold a big farm a while back when the tax was 6 % and the seller almost had a heart attack when he saw the withholding amount. Maryland increased just about every tax one can think of in the past year. Is Maryland becoming a business "unfriendly" state? Time and the tax man may show us !

Posted by Mickey Hayward - Farms, Land, Homes MD and DE on 01/02/2008 01:26 PM

Comments (20)

real estate, denton, eastern shore, maryland, property, transfer tax, withholding, farm sale

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20 Comments on Non-Resident Owners of Maryland Property - Transfer Tax (Withholding) Rate Increase

JAN

2008

This is a withholding tax, which is treated as an estimated tax payment towards your non-resident income tax return for Maryland. Depending on your basis in the property and resultant capital gain, your actual net tax will be whatever your apportioned MD income is subject to MD personal income taxes, currently at 4.75% highest bracket. Still, it's a b*tch to see that money taken at closing then have to wait until after the tax year to file for a refund of a portion of it.

John - You are right on in your assessment of this tax issue. It's a tax paid on the gain. They call it withholding tax yet if the owner is not a Maryland resident and/or does not have employment in the state of Maryland there is no "income" to withhold tax from and otherwise there would be no tax return to file. The gain on the property is the Maryland income. You are right too that they withhold the tax on the gain (which at settlement is the difference in any outstanding mortgage payoffs from the amount being paid for the property). The state documentary stamp taxes and the state and county and local transfer taxes were not enough so they had to find out how to get a little more out of everyone. Sure makes me want to buy property in Maryland. I am a Delaware resident now.

JAN

2008

I agree this tax was put in place to increase revenues. That may be good for some, but it is a real burden for many, especially in today's bear market. Even worse is the impact ot seems to have on military non-resident owners.

Can anyone shed light on how the military seller should address the Transfer Tax and if there is anyway to file for a refund of said tax if you have no other reason to file a Maryland tax return?

Rob S. - Everyone should complain to his or her representatives especially where the military is concerned. That's why I made the post here. I retired from the Air Force and bought property in Maryland. I have since paid this ridiculous tax on the gain that I made on the property. I think you can file a non-resident Maryland return and only claim the gain as Maryland income. Maybe you will get most of the tax back. I think I got part of mine back but not all of it. Check with an accountant. Maybe someone else can jump in here who has a better knowledge about this issue.

APR

2008

These labels are counter-productive. As a listing agent, we just need to take into account this withholding amount when estimating net proceeds and not editorialize about it.

APR

2008

Goodness. Keep up the good work. The withholding is onerous and the tax upon which it is based is onerous and the rest of the taxes that have gone through the roof since the last election are onerous.

Ms. Woda - I beg to differ. What we need not do is criticize a fellow real estate professional for expressing an opinion. That's the beauty of a free country and a free democratic society. I simply stated an opinion about the tax system. I prefer to give opinions and to speak out against out of control taxes at every opportunity. I don't prefer to just sit by and become a Leming. What you did is editorialize my blog, not make an intelligent comment about Maryland's very high tax structure. I encourage everyone who pays taxes in Maryland to contact their representatives and complain. I pay an enormous amount of taxes to the state of Maryland so I feel that gives me a right to speak out. Don't "editorialize" my opinions.

MAY

2008

Hi Mickey,
Seems that the government (federal, state and local) are finding more and more ways to dip into our pockets.

Seems punitive to tax non residents more than residents. A good way for someone not to want to own Maryland property, is that the design of the tax law? In Wisconsin there is a lotto credit, it was given only to residents and a class action law suit over turned it, giving the credit to all property owners.

Cynthia - In the past year, in Maryland, the government has become very creative in finding ways to dig into our pockets. Sales taxes even went up another 1 % in the past year. I'm actually a Delaware resident who got hit with the "non-resident" tax a while back. Luckily, it was not a big sale. On the other hand I recently had a seller from out of state sell a farm for $1,685,000 and he had to pay the "non-resdient" tax on that amount, in addition to the already high state and county transfer taxes. Whew!

Mary - I'm with you on this. Is seems punitive to levy such a tax on "non-residents." It seems that the tax laws may be designed to make out of state people not want to own property in Maryland. Hooray for the Wisconsin residents for sticking up for themselves.

JUL

2008

My job is supposed to move from NJ to MD in a few years, and I had planned on keeping my NJ house to come back on the weekends (keep the primary resident status). In MD I may rent or even built a moderate investment house to live in during the work week. After I can retire from the job (which can be about 6 years after my job moves) I may return to NJ (or some say I may like MD and want to stay there). MD seems just as bad as NJ tax wise, but NJ gets you in different ways. NJ has a simlar withholding only if you are leaving the state (called the exit tax - something just recent also). Anyway, maybe Delaware (about a 30 mile commute to where my job will move) may be an option if I want to do have a house, but I wonder how my tax will play out with...NJ primary residence, MD work, and DE as my "bedroom" during the week. Maybe I should just rent or even live in a sleeze hotel and get the know the real Maryland before I plant any roots. Then there is the county tax collected on your AGI (percentages vary by county, some 3% of your AGI). I imagine I still have to pay this, but what if you don't live in MD? Hmm. Maybe DE is the answer. I hope I didn't hijack the thread because I went off topic a little.

Rob - I live in Delaware and work in Maryland. At tax time I have always paid so much in Maryland taxes that I don't owe any Delaware taxes. Delaware gives me credit for taxes paid to Maryland. Delaware doesn't have a local tax like Maryland does and there is no state sales tax so from a tax standpoint I like it.

JUL

2008

Liberal politicians at work. It sounds as if the Maryland legislators are going to tap everyone they can get their hands on. Bad for business in the state though.

Kevin - I agree. It doesn't help business. The State of Maryland taxes pretty heavily but by far not as heavily as some of the other states. Check out these stats, courtesy of The Tax Foundation: http://www.taxfoundation.org/news/show/335.html This kind of says it all. Combined State and Local Tax Burdens compared to other states puts Maryland at a rank of 23 (with 1 being the highest amount of tax burden) and Delaware at 47 nationwide. Northeastern states hold six of the top 10 positions for most taxed states. It will be interesting to check back here next year, after another big year of taxation in Maryland, to see where Maryland ranks for 2008.

AUG

2008

I am working with sellers who have owned a property in Baltimore City for over 30 years. He was transferred. So they moved to West Virginia and rented the house to their daughter who eventually moved to Tennessee. Originally they were planning to retire in Maryland but now they want to go to Tennessee to be with their daughter and future grandchildren. Currently both are retired and are watching their retirement money investment diminish not only with the devaluation of their property, but by Maryland's greed. They are not happy but understand the former - tough timing, but the latter their furious with!!

Elsa - Isn't this really sad . . .

AUG

2008

It is not clear upon what portion of the proceeds that are taxed. From the above comments, it would seem that it would only be upon the difference between the outstanding debt on the property and the sale price (or adjusted sales price after closing costs?). What if the original price of the house plus improvements exceeds this amount and thus you would be taxed on some of your improvements (which you were already taxed on when they were made in terms of taxes on material and labor costs).

AUG

I'm recently retired from the Air Force and have returned to MD after 22 years. My family is here and I thought I would return to be closer; however, I have claimed Texas as my home of residence for the last 9 years. I bought a house but my sibling mentions I must change my state of residence. I really do not wish to change my state of residence to MD I really want to keep it as Texas and on top of that I recently got engaged to my boyfriend whom is British and I will return to leave in the UK. I wish to rent but once again as mentioned I do not wish to change my residency. Would it be profitable to me to rent or should I just sale it and but all this MD tax problems behind me.

I knew there was a reason I did not want to claim MD as my home of residence.

SEP

Denice - Sorry I didn't reply to your post sooner. Maryland has a website that you can go to and get the forms to figure out your Non Resident Withholding amount based on your particular property and situation. Here's a link which may be of some help to you:

http://business.marylandtaxes.com/taxinfo/withholding/sale_property.asp

I retired from the USAF too. Let me know how you make out. I'm thinking of moving to Texas myself. It's a tax friendly state to veterans.

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