The Massachusetts Department of Revenue (“DOR”) has issued a new set of regulations, effective November 1, which provide that, subject to certain exemptions, a “withholding agent” is required to withhold an amount that reasonably approximates the personal income tax or corporate excise tax, as applicable, which will be owed on the net gain resulting from a non-resident’s sale or exchange of Massachusetts real property. This withholding obligation applies only when the gross sales price of the property is $1,000,000 or greater. A withholding agent is defined as “the person responsible for closing a real estate transaction, including an attorney, escrow company, or title company, or any other person who receives and disburses the consideration or value for a transfer of real estate”. The gross sales price includes cash, the fair market value of any other property received and any outstanding liabilities assumed by the transferee.
The essence of the regulations is that in a transfer or sale of Massachusetts real property that meets the $1,000,000 threshold, withholding agents must collect and remit the required withholding and file a return with the DOR. The tax rate for purposes of calculating the withholding amount is 4% of the gross sales price plus, if the transferor of the real estate is subject to the so-called “millionaire’s tax”, an additional 4% of that portion of the gross sales price exceeding the threshold. A transferor may elect an alternate computation based on an estimate of the tax which will actually be due on the sale.
For each transfer subject to withholding, the withholding agent must electronically file a Nonresident Real Estate Withholding (NRW) Form and any required Transferor’s Certification, and remit any withholding tax payment to the DOR within ten days of the closing. A Transferor’s Certification, to be completed by transferors and withholding agents, verifies the amount of tax to be withheld. The withholding agent will be required to rely on the details provided in the Transferor’s Certification in order to accurately complete the NRW Form. The withholding agent is also required to attach the settlement statement from the closing when submitting the NRW Form.
When there are multiple transferors involved in a transaction, the withholding amount must be calculated separately for each transferor. However, whether the gross sales price meets or exceeds $1,000,000 is determined based on the total value of the entire transaction.
Withholding on a transfer or sale is not required for certain types of transferors. The regulations include a number of exemptions, but a Transferor’s Certification and NRW Form, must still be filed, certifying that an exemption applies. The following is a summary of the various types of transferors which qualify for an exemption (the Transferor’s Certification describes each exemption in greater detail):
- A full-year Massachusetts resident, meaning someone who (i) has been a resident from January 1 of the year in which the real estate transfer occurs through the closing, and (ii) represents that he or she will continue to be a resident thereafter. For these purposes, a resident is (i) any natural person domiciled in the Commonwealth or (ii) any natural person who is not domiciled in the Commonwealth, but who maintains a permanent residence in the Commonwealth and spends, in the aggregate, more than 183 days of the taxable year in the Commonwealth.
- A so-called pass-through entity, specifically excluding a single member limited liability company.
- A publicly traded partnership.
- An estate of a resident decedent or a resident trust.
- A corporation with a continuing Massachusetts business presence or a member of a combined group where one member of such group has a continuing Massachusetts business presence.
- An organization qualified under Section 501 of the Internal Revenue Code and exempt from tax in Massachusetts, unless the transfer results in unrelated business taxable income to the transferor.
- Certain insurance companies.
- The United States Government, the Commonwealth or any political subdivision thereof, or their respective agencies.
- The Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association or a private mortgage insurance company.
- Certain financial institutions maintaining a place of business in Massachusetts.
- A real estate investment trust, provided that the proceeds from the trust’s sale of the real estate are distributed to the trust’s shareholders in the form of dividends derived from the sale of real estate.
- The Transferor’s Certification also identifies certain types of transactions entitled to a full or partial exemption, such as transfers between spouses and transfers that qualify as like-kind exchanges under Section 1031 of the Internal Revenue Code. To avoid withholding on deferred gain, the transferor must provide the withholding agent with a statement in the Transferor’s Certification that specifies the amount of gain being deferred and affirms the transferor’s consent to personal jurisdiction in Massachusetts for the assessment and collection of any taxes, interest, penalties, and fees that become due when the deferred gain is ultimately recognized.
A link to the current version of the Transferor’s Certification and accompanying instructions is to follow for further guidance: View Certification. In addition, as always, members needing additional assistance should contact their broker.
Philip S. Lapatin
Holland & Knight LLP