Massachusetts Proposes Nonresident Capital Gains Withholding: What Sellers and Realtors Need to Know
If you’re a real estate professional or a homeowner looking to sell property in Massachusetts, a major tax change is on the horizon. Massachusetts is considering implementing a nonresident capital gains tax withholding, similar to the system already in place in Rhode Island, Vermont, and Maine. This means that nonresident sellers of Massachusetts real estate may soon face a withholding requirement at closing to cover estimated state capital gains taxes.
Rhode Island’s Nonresident Withholding: A Model for Massachusetts?
Rhode Island requires nonresident sellers of real estate to have a portion of their sale proceeds withheld at closing to cover potential state capital gains taxes. The amount withheld is generally 6% of the seller’s estimated net gain or 6% of the seller’s net proceeds. Sellers who believe the withholding exceeds their actual tax liability can file for a refund when they file their Rhode Island state tax return.
This system ensures that Rhode Island collects taxes owed by out-of-state property owners who might otherwise sell and leave without paying. Massachusetts is now looking to adopt a similar approach.
What the Massachusetts Proposal Means for Sellers
If Massachusetts enacts this proposal, nonresident sellers will likely have a portion of their proceeds withheld at closing to cover estimated state capital gains taxes. While details are still being finalized, the system is expected to follow the models used by Rhode Island, Vermont, and Maine.
For home sellers, this means:
- Less cash at closing – A portion of the sale proceeds will be withheld.
- Potential refunds – If the withheld amount exceeds the actual tax owed, sellers can file a Massachusetts tax return to claim a refund.
- More paperwork – Sellers may need to file additional forms to request exemptions or reductions in withholding.
Withholding Rules in Vermont and Maine
Massachusetts is not the first New England state to consider such a measure. Both Vermont and Maine have similar systems in place:
- Vermont – Nonresident sellers have a withholding of 2.5% of the sale price or 6.7% of the gain, whichever is higher.
- Maine – The withholding is 2.5% of the sales price, with exemptions available if the tax liability is lower.
These policies, like Rhode Island’s, are designed to prevent nonresident sellers from avoiding state capital gains taxes.
FIRPTA: The Federal Precedent
On the federal level, a similar withholding applies to foreign sellers of U.S. real estate under the Foreign Investment in Real Property Tax Act (FIRPTA). Under FIRPTA, when a foreign seller sells U.S. real estate, 15% of the sale price is withheld at closing to ensure the IRS collects any taxes due. This federal law has been in place for decades and serves as a model for state-level nonresident withholding policies.
What Realtors and Sellers Should Do Now
With Massachusetts moving toward implementing a nonresident withholding tax, realtors and sellers should:
- Stay informed – Monitor updates on the proposal’s status and details.
- Plan ahead – Nonresident sellers should be aware of the potential withholding when considering a sale.
- Consult professionals – Attorneys and accountants can help sellers understand how the withholding affects them and what steps they can take to minimize its impact.
As this proposal moves forward, sellers and real estate professionals should prepare for a new tax landscape in Massachusetts. If you have questions about how this could affect you or your clients, now is the time to seek guidance.
Questions?
Contact attorney Adam H. Thayer, Esq. at Sayer Regan & Thayer, LLP at (401) 849-3040 or AThayer@srt-law.com. Adam handles residential and commercial real estate matters and is licensed to practice law in RI, MA, CT, NH, VT, ME, and FL.