Alabama Withholding Tax forOut-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 area 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.