Massachusetts DOR announces withholding on sales of Massachusetts real estate

In brief

What happened?

The Massachusetts Department of Revenue (DOR) on October 8, 2024 issued a working draft regulation that, if formally promulgated, will require withholding on the net gain derived from certain transfers of Massachusetts real estate where the gross sales price is at least $1 million.  Generally, the person responsible for closing a real estate transaction will be designated as the withholding agent, who will be required to remit the tax withheld within 10 days of the closing.  Exemptions are provided for certain types of transferors, including Massachusetts residents and corporations that maintain a place of business in Massachusetts.   

Why is it relevant?  

Currently, withholding is not required on sales of Massachusetts real estate. If the regulation is promulgated, Massachusetts non-resident individual transferors of Massachusetts real estate subject to the withholding regime would be subject to a withholding tax of 5% or 9% (to the extent that net gain on the sale exceeds the taxable income threshold for imposing the 4% surtax) and corporate transferors with no continuing presence in Massachusetts would be subject to a withholding tax rate of 8%. 

Actions to consider  

Taxpayers and other interested parties have until October 29, 2024 to comment on the working draft regulation. A second opportunity to comment on the regulation will arise after it is formally proposed and a hearing date is set.

Exemptions for certain types of transferors

Massachusetts resident individuals are exempt from withholding on their sale of Massachusetts real estate provided that a transferor’s certification is provided at or before closing to the withholding agent. For purposes of the withholding regime, a Massachusetts resident is an individual who will file a Massachusetts personal income tax return as a full-year resident for the year in which the real estate transfer occurs and will represent that he or she will continue to be a resident after the closing date for the transfer.    

A corporation with a continuing presence in Massachusetts is also exempt from withholding on its sales of Massachusetts real estate if five additional conditions are met: (1) the corporation filed a Massachusetts income tax return in the tax year prior to the transfer, (2) the corporation maintains a place of business in Massachusetts at the time of the transfer, (3) the corporation represents that it or a member of its combined group will report the transfer of the Massachusetts real estate on a Massachusetts return for the current year, (4) the corporation represents that is it not selling or transferring all or substantially all of its Massachusetts assets, and (5) the corporation provides a transferor’s certification to the withholding agent at or before closing. 

There are other categories of transferors that are exempt from the withholding requirements, including (but not limited to) pass-through entities, publicly traded partnerships, tax-exempt organizations (unless the transfer results in unrelated business income), insurance companies, financial institutions, REITs, the US government, and the Massachusetts government or any of its political subdivisions. These transferors also are required to provide a transferor’s certification to the withholding agent at or before closing to claim the exemption. 

Withholding agent and transferor’s certification

The person responsible for withholding the tax and remitting it to DOR is the withholding agent. Generally, the withholding agent is the person responsible for closing the real estate transaction (e.g., an attorney, escrow company, title company, or any other person who receives and disburses the consideration for a sale or transfer of real estate). For transfers where there is no withholding agent, the transferee is required to act as the withholding agent. 

The withholding agent is required to file the withholding return and a transferor’s certification, if applicable, and remit the withholding tax payment to the DOR within 10 days of the closing of the sale (i.e., the settlement date). The withholding return must provide the date of the transfer, names, addresses and identification numbers of the transferee and transferor, total sales price, the transferor’s cost basis, total gain recognized, and the amount of withholding to be remitted. As for the transferor’s certification, this is a document on which the transferor claims an exemption from withholding (see the categories for exemption discussed above) in any case in which the gross sales price is at least $1 million. Note that the transferor’s certification may not be submitted after the due date of the withholding return.