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Alabama
Withholding Tax for Out-of-State Property Owners
What
is it?
The Alabama Legislature has enacted a
new law (§40-18-86 Code of Alabama) that requires Buyers to
withhold 3% of the purchase price or consideration paid for the sale or transfer
of real estate by non-resident individuals and 4% for sales by nonresident
corporations, partnerships, or unincorporated associations of the State of
Alabama. THE ACT APPLIES TO THE SALE OF ALABAMA REAL PROPERTY BY A SELLER WHO
IS A NONRESIDENT OF THE STATE OF ALABAMA.
Why is
it being withheld?
The money is required to be withheld
by the Buyer in order to collect the capital gains tax owed by a nonresident
seller to the State of Alabama.
Is
this a new Tax?
NO. This is not a new tax but
rather a new collection mechanism (§40-18-86 Code of Alabama)
approved by the Alabama Legislature, to collect capital gains taxes owed on
the sale of real property.
When
does it take effect?
The collection mechanism law will go
into effect on August 1st, 2008 on all transfers or sales.
Are
real property sales subject to taxes?
Yes, in many cases. All capital gains
are subject to taxation; however, there are a number of exemptions to the law
including sales involving a primary residence and the current sales price
thresholds. (See below)
What
are the sales price thresholds?
AUGUST 1, 2008 THROUGH DECEMBER 31,
2008
Sales by nonresidents of $800,000.00
and above are subject to the withholding requirement.
JANUARY 1, 2009 AND THEREAFTER
Sales by nonresidents of $300,000.00
and above will be subject to the withholding requirement.
Who is
liable in collection of tax owed?
·
Under the law the buyer is liable for the
capital gains tax owed by the seller if the tax is NOT withheld and timely
remitted to the Department of Revenue after the sale or transfer of the real
property.
· The Alabama Department of
Revenue has adopted interim guidelines, procedures, and forms for the
enforcement of the collection of the capital gains tax on nonresident sales.
· Typically the closing
attorneys, agents and title companies will handle the actual collection and
remit to the Department of Revenue.
How
does this affect sellers?
Nonresident individuals will have
3% of the purchase price or consideration paid withheld unless they execute a
Department of Revenue Sellers’s Certificate of Exemption, Affidavit of Seller’s
Residence or Affidavit of Seller’s Gain. Forms will be available through the
Department of Revenue’s website at
www.revenue.alabama.gov. (click on What's New)
Nonresident corporations,
partnerships, or unincorporated associations of the State of Alabama will be
subject to the 4% withholding criteria.
§40-18-86 Code of Alabama
states: “Any Seller or transferor who meets all of the following conditions and
who provides the buyer or transferee with an affidavit signed under oath
swearing or affirming that all of the conditions are met will be deemed a
resident for the purposes of this section:
1. The seller or transferor
has filed Alabama income tax returns or appropriate extensions have been
received for the two income tax years immediately preceding the year of sale.
2.
The seller
or transferor is in business in Alabama and will continue substantially the same
business in Alabama after the sale or the seller or transferor has real property
remaining in the state at the time of closing of equal or greater value than the
withholding tax liability as measured by the 100 percent property tax assessment
of such remaining property.
3. The seller or transferor
will report the sale on an Alabama income tax return for the current year and
file it by the due date.
4. If the seller or
transferor is a corporation or limited partnership, it is registered to do
business in Alabama.”
Do the
seller’s ever get this withheld tax back?
When seller’s file their tax returns
their accounting professionals will determine the course of action.
How
does this affect buyers?
Under
the law the buyer is liable for the capital gains tax owed by the seller
if the tax is NOT withheld and timely remitted to the Department of Revenue
after the sale or transfer of the real property.
Are
there any exemptions from the withholding law?
Yes. There are a number of
exemptions to the law including sales involving primary residences. SEE SELLER
CERTIFICATE OF EXEMPTION
www.revenue.alabama.gov.
Why is
this important?
·
Nonresident sellers need to be aware of the exemptions and that a percentage
will be withheld. This will obviously affect those who may need to close
on another property immediately.
·
Buyers need to be made aware that this is their responsibility so they are
prepared at closing.
Do
other states have these requirements?
YES. Approximately 14 states have
similar statues and guidelines.
Who
has authority over the guidelines and implementation?
Department of Revenue
www.revenue.alabama.gov
Where
can I read the entire Law and get further information as it is available?
AAR will continue to provide
updates as information becomes available through the Department of Revenue
website at
www.revenue.alabama.gov.
This notice is provided for
informational purposes only as a benefit to members of the Alabama Association
of REALTORS®. This information is not given as legal advice. Buyers
and Sellers are urged to contact closing attorneys,
closing agents and/or
title companies.
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