A new regulation taking effect in Massachusetts will introduce a significant tax withholding for non-residents selling real estate valued at $1 million or more. Starting November 1, 2025, these transactions will be subject to a default 4% withholding on the gross sales price, a move that could substantially alter the financial landscape for out-of-state property owners.
The rule, designated as 830 CMR 62B.2.4, aims to ensure tax compliance from sellers who do not reside in the state. It introduces new procedural requirements for all parties involved in high-value real estate closings, including sellers, buyers, and closing agents, and could delay the seller's receipt of full proceeds from a sale.
Key Takeaways
- A new tax withholding rule applies to non-resident sellers of Massachusetts real estate starting November 1, 2025.
- The rule affects properties with a gross sales price of $1,000,000 or more.
- A default withholding of 4% of the gross sales price will be applied. This rate can increase to 8% for higher amounts.
- Sellers must provide a "Transferor's Certification" form to determine their status and potential exemptions.
- Closing agents, attorneys, or buyers are responsible for withholding and remitting the tax.
Who is Subject to the New Withholding Rule?
The new regulation specifically targets non-resident individuals and entities selling property in Massachusetts. The primary goal is to capture state tax revenue on capital gains that might otherwise be difficult to collect from sellers with no permanent ties to the state.
However, not every non-resident seller will be affected. The state has outlined several key exemptions. Individuals who are full-year Massachusetts residents are exempt, as are certain types of business structures and organizations.
Primary Exemptions from Withholding
Several categories of sellers are not subject to this new withholding requirement. These include:
- Full-year Massachusetts residents.
- Pass-through entities like partnerships and S corporations, which have separate withholding obligations.
- Resident trusts or estates with a resident decedent.
- Corporations that maintain a continuing business presence in Massachusetts.
- Tax-exempt organizations, unless the property sale generates unrelated business taxable income (UBTI).
- Real Estate Investment Trusts (REITs) that distribute gains as dividends.
The burden of proof lies with the seller to demonstrate their eligibility for an exemption. This is managed through a new mandatory document required at closing.
Understanding the Financial Impact
The financial implications for sellers are significant. The default withholding rate is set at 4% of the gross sales price. For sales amounts that exceed the state's surtax threshold, which was $1,083,150 for the 2025 taxable year, the rate for individual sellers increases to 8% on that excess portion.
It is important to note that the withholding is calculated on the gross sales price, not the profit. The gross sales price includes cash paid, the fair market value of any other property exchanged, and any liabilities or debts assumed by the buyer.
Example Calculation
For a non-resident selling a property for $1.5 million, the default withholding would be at least $60,000 (4% of $1.5M). This amount is withheld at closing and sent to the state, directly reducing the seller's immediate proceeds.
An Alternative Calculation Method
Sellers have an option to potentially lower the withheld amount. By making an election on the required certification form, they can request withholding to be based on the estimated net gain instead of the gross sales price. This net gain is calculated by subtracting the property's adjusted basis and settlement expenses from the sales price.
Under this alternative method, the withholding rates are higher—up to 9% for individuals and 8% for corporations—but are applied to a much smaller number (the profit). For sellers with a high cost basis in their property, this election could result in a significantly lower amount being withheld at closing.
Navigating Exemptions and Reduced Withholding
Beyond the primary exemptions for resident status, the regulation allows for reduced or eliminated withholding in specific transactional circumstances. These provisions are designed to account for situations where the default withholding would be impractical or unfair.
Sellers may qualify for a reduction if the transaction falls into one of these categories:
- Debt-Heavy Sales: Transactions where the withholding amount is greater than the cash proceeds remaining after paying off the seller's secured debt.
- Foreclosures: A foreclosure where the sales price does not exceed the amount of debt on the property.
- Involuntary Transfers: Certain involuntary transfers, such as those resulting from eminent domain, under IRC section 1033.
- Like-Kind Exchanges: For transactions structured as a like-kind exchange under IRC section 1031, withholding is deferred on the portion of the gain that is not recognized for tax purposes.
- Installment Sales: Sellers can elect to have withholding apply proportionally to each payment received, rather than on the entire sales price at the initial closing.
These scenarios require careful documentation and proper election on the certification form to ensure the correct withholding amount is applied.
The New Closing Process and Responsibilities
The regulation establishes a clear process that must be followed for all real estate transactions over the $1 million threshold, regardless of whether tax is ultimately withheld. The central figure in this process is the withholding agent.
The withholding agent is typically the closing attorney, escrow company, or title company. In transactions without these professionals, the responsibility falls directly to the buyer.
Key Steps in the New Process:
- Seller Provides Certification: Before the closing, the seller must complete and provide a "Transferor's Certification" form to the withholding agent. This official form from the Massachusetts Department of Revenue is where the seller declares their residency status, claims any exemptions, or elects an alternative withholding calculation.
- Agent Determines Withholding: The withholding agent uses the certification to determine if withholding is required and, if so, how much. If a seller fails to provide the certification, the agent is required to withhold at the 4% default rate on the gross sales price.
- Filing and Remittance: Within 10 days of the closing, the withholding agent must file a new return, Form NRW (Nonresident Real Estate Withholding), with the state. This filing must include the Transferor's Certification, a closing disclosure statement (HUD statement), and the remitted tax payment, if any.
"Under the new regime, sellers must be aware of the economic impact if withholding tax applies to them and be prepared in advance to provide a Transferor's Certification, and the withholding agent/buyer must be aware of their potential withholding and filing obligations."
Failure by the withholding agent to comply with these duties can result in penalties. This new layer of responsibility places a significant compliance burden on real estate professionals and buyers involved in high-value property sales. For sellers, the key takeaway is the need for proactive preparation to avoid unexpected financial holds on their sale proceeds.
