Real estate withholding is the prepayment of the estimated capital gains tax which is payable by sellers on the profit made from the sale of real estate. In other words, it represents the tax on the gain from the sale of real estate. Several states require this, but not all. Why?
States which are vacation destinations or ideal spots for second homes realized that rather than relying on out of state sellers to remember to file a state specific tax return for the year in which they sell real estate, they would reverse the burden and withhold an amount at closing intended to cover the capital gain tax. It is an incentive to ensure the proper tax return is filed and the taxes due are paid timely.
This year we will feature articles about some of the states with real estate withholding requirements. The articles will demonstrate how different the requirements are from one state to the next.
In 2014, we featured examples of F.I.R.P.TA. withholding requirements. If you recall, F.I.R.P.T.A. is the acronym for the Foreign Investment in Real Property Tax Act. This is a federal law which affects non–U.S. citizens selling their interest in U.S. real property. The articles featured this year will focus on the various state requirements which are not F.I.R.P.T.A based.
This article and those which follow are simply guides. The pre–payment, their tax forms, amounts and processes vary from state to state. For specific instructions on the proper requirements and forms for each state discussed, be sure to go to each state's department of revenue or taxation website. Each state may make changes from year to year, or even in the middle of any given year. Always go to the taxing authority website for specific instructions and applicable forms.
Article provided by contributing author:
Diana Hoffman, Corporate Escrow Administrator
Fidelity National Title Group
National Escrow Administration