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Sales by nonresidents of Alabama (for $300,000 and above) are subject to withholding. Under the law, the buyer is liable if the estimated tax is not withheld and timely remitted to the Alabama Department of Revenue (DOR) after the sale of real property.
Typically, closing attorneys, settlement agents and title companies will handle the actual collection and remittance to the DOR, on behalf of the principals pursuant to their written mutual instructions.
This is neither a sales tax nor a real estate transfer tax; it is income tax withholding. The buyer is responsible for providing the seller with the appropriate forms from the DOR as receipt for the payment.
The seller will attach a copy of the form to their Alabama income tax return to claim responsibility for the withholding paid. The amount withheld and remitted by the buyer will be considered an estimated tax payment made on behalf of the seller.
Once the return is completed and filed, the actual tax liability will be determined. The taxpayer/seller either claims a refund for any overpayment or pays the amount of any underpayment. The same process as with any other income tax return.
Buyers are to withhold 3% of the purchase price or consideration paid for the sale or transfer of real estate by nonresident individuals and 4% for sales by nonresident corporations, partnerships, or unincorporated associations.
An alternative for calculating the withholding based on the sales price is to calculate based on the seller's gain. To calculate based on the gain, the seller must complete the appropriate DOR form attesting to the amount of the taxable gain.
If the amount for the withholding is more than the cash received at closing, the buyer must withhold and remit only the net proceeds otherwise payable to the seller. The completed Form is sent to the DOR at closing with the payment.
Sellers may be exempt from withholding if they execute a certificate of exemption, affidavit of seller's residence or affidavit of seller's gain on the appropriate form mandated by the DOR. These are available on their website at www.revenue.alabama.gov.
Exemptions include:
- Principal Residence: The sale of a principal residence (pursuant to Internal Revenue Code Section 121) is exempt from the withholding requirement.
- Residents of Alabama: Individuals and business entities domiciled in Alabama are exempt from withholding. Business entities organized under Alabama law or who have their principal place of business in Alabama are considered domiciled. This also applies to tax exempt organizations where the income from the sale is not subject to Alabama income tax.
- Foreclosures: If the property is being foreclosed upon or transferred via deed in lieu of foreclosure with no additional consideration, the buyer is not required to withhold.
- Federal and State Agencies, FNMA, GNMA, or FHLMC or Insurance Companies: Sellers who are an agency or authority of the United States or the state of Alabama, Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), a private mortgage insurance company or any insurance company which pays tax on its premium income to the state, are exempt from withholding.
- Non-Recognition Transactions: Sales where the gain is not recognized by the seller for income tax purposes, such as a 1031 like-kind exchange, are not subject to withholding.
- Limited Ownership Interests: Transfers of limited interests in real property, such as easements or rights of way, documents that secure indebtedness such as a mortgage or deed of trust, or certain leases are not subject to withholding.
For questions and additional information, contact the Alabama Department of Revenue at:
334.242.1300
www.revenue.alabama.gov
The information provided herein does not, and is not intended to, constitute legal advice; instead, all information, and content, in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; Fidelity National Title Group does not recommend or endorse the contents of the third-party sites.
Article provided by contributing author:
Diana Hoffman, Corporate Escrow Administrator
Fidelity National Title Group
National Escrow Administration
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