ADOR - NonResident Withholding Requirement on Certain Sales
Frequently Asked Questions
Withholding on Sales/Transfers of Real Property and Associated Tangible Personal Property by Nonresidents (Act 2008-504)
What kind of tax is this? Sales tax? Real estate transfer tax?
No, this is neither a sales tax nor a real estate transfer tax. It is income tax withholding. The principle is similar to income tax withholding by employers. The buyer withholds Alabama income tax from the payment to the nonresident seller. The buyer is responsible for providing the seller with a copy of Form WNR and Form WNR-V. The seller will attach a copy of Form WNR to the appropriate Alabama income tax return to claim credit for the taxes paid. The taxes withheld and remitted by the buyer to the Alabama Department of Revenue will be considered as an estimated tax payment made on behalf of the seller.
So the nonresident seller is still required to file a Alabama income tax return, even with the withholding?
Yes. In general, income from the sale of Alabama property is required to be reported on an Alabama income tax return. Once the nonresident return is completed and filed by the due date of the return including extensions, the actual tax liability will be determined, and the taxpayer either claims a refund for any overpayment, or pays the amount of any underpayment, the same as with any other income tax return.
How is the amount to be withheld determined?
Section 40-18-86, Code of Alabama 1975, generally requires that 3 or 4 percent of the purchase price be withheld. However, if the gain recognized on the sale is less than the purchase price, and the seller provides the buyer with an Affidavit of Seller’s Gain (see Form NR-AF2), then the buyer may withhold 3 or 4 percent of the amount of the gain. If the amount to be withheld, as based on the purchase price or the gain, is greater than the net proceeds of the transfer, then only the net proceeds need be withheld and remitted by the purchaser. Generally, the net proceeds of the sale are the net payments to the transferor as shown on the closing statement, but “net proceeds ” may be calculated as the amount of money and other consideration received by the seller after deducting mortgage or other secured debt, ad valorem taxes, sales commissions, title premiums, survey expense, costs for environmental and other reports, and all other closing costs and expenses.
Are only transactions which result in taxable income to the seller subject to withholding?
Yes. Since Section 40-18-86, Code of Alabama 1975, allows a seller to base withholding on the recognizable gain from a transaction. Transactions which result in no taxable income do not require withholding. Please see Form NR-AF2.
Is withholding required when there are several owners, and some of the owners are nonresidents?
Yes. The residency of the owners of the property will be determined separately. Withholding is required only on the purchase price or gain recognized by the nonresident sellers. In the case of co-owners who are married, ownership is determined separately if one owner is a nonresident. Separate forms must be completed for each nonresident seller/transferor who will be required to file an Alabama income tax return.
If a buyer reasonably relies on a seller’s sworn affidavit of residency, will the buyer be liable if it later turns out that the seller does not meet the conditions of deemed residency?
A buyer’s reasonable reliance on a seller’s affidavit should be sufficient. The standard is a “good faith” reliance standard. A buyer will be held liable if he had actual or constructive knowledge that the seller’s affidavit was false or contained erroneous information. The buyer may rely on the seller’s affidavit unless the buyer knows or should know, based on the buyer’s knowledge at the time of closing, that statements made on the affidavit are false. The buyer has no duty to investigate the statements made on a seller’s affidavit.
If the seller is an Alabama resident, must he provide the buyer with a sworn affidavit Form NR-AF1 (or for deemed residency)?
No, an Alabama resident does not need to provide an affidavit since this withholding law does not apply to residents. The affidavit is for nonresident sellers who wish to be “deemed” residents for withholding purposes. In a transaction where a nonresident seller is considered a “deemed resident” of Alabama, the buyer should retain a copy of the affidavit, and must submit the original copy to the Alabama Department of Revenue. Even though an affidavit is not required when the seller is an Alabama resident, the affidavit may be used by a resident seller if the buyer wishes to document the seller’s representation of Alabama residency. In this situation, the affidavit does not need to be sent to the Alabama Department of Revenue, but the buyer and seller may wish to keep copies for their records.
Must a certificate of exemption (Form NR-AF3) be filed when the seller is exempt by law from the withholding requirement?
No. The filing of an affidavit establishing an exemption is not required. However, the buyer may wish to have the seller execute Form NR-AF3 or a similar affidavit, in order to document the buyer’s reliance on the seller’s representation of exemption.
Is withholding required on a like-kind exchange of property?
Withholding is not required to the extent that the income from the sale is not subject to Alabama income tax. Transfers of real property where gain is realized by the seller, but completely not recognized by the seller for Alabama income tax purposes, such as a like kind exchange, are not subject to the withholding provisions of Alabama Code Section 40-18-86. Transfers of real property where gain is realized by the seller, but partially not recognized by the seller for Alabama income tax purposes, are subject to the withholding provisions of Alabama Code Section 40-18-86 only to the extent of the recognized gain.
Is withholding required on a transaction that qualifies as a Section 1031 exchange under the Internal Revenue Code? What if the transaction is a “deferred” Section 1031 exchange?
As in an exchange of property such as a like-kind exchange, withholding is not required on a Section 1031 exchange to the extent that the income from the sale is not subject to Alabama income tax. Transfers of real property under a Section 1031 exchange where gain may be realized by the seller, but completely not recognized by the seller for Alabama income tax purposes are not subject to the withholding provisions of Alabama Code Section 40-18-86. Transfers of real property where gain is realized by the seller, but partially not recognized by the seller for Alabama income tax purposes, are subject to the withholding provisions of Alabama Code Section 40-18-86 only to the extent of the recognized gain, such as a Section 1031 exchange where monies received by the seller exceed the exchange transaction. If the transaction is a “deferred” Section 1031 exchange, the transaction will qualify for the exemption to the withholding requirement only if the seller agrees to have the qualified intermediary file the required payment voucher and remit any withholding due to the Alabama Department of Revenue in the event that monies remain after the 180-day, deferral period.
If an Alabama resident relocates to another state and buys another residence, does his Alabama residence cease to be his principal residence for purposes of Alabama law?
In order to be exempt from withholding, the property must be the principal residence of the seller or transferor for purposes of the income exclusion under the Internal Revenue Code. This rule applies no matter how much time elapses after the seller relocates to another state. As long as the property qualifies as a principal residence under the Internal Revenue Code, the exemption from withholding applies for the gain that is excluded from federal and Alabama AGI under the Internal Revenue Code.
If the seller of the property is an exempt organization, is the sale subject to withholding?
Not unless the transaction results in unrelated business taxable income under Internal Revenue Code
Section 512. In general, any transaction which results in unrelated business income as defined in Internal Revenue Code Section 512 is subject to withholding. Transactions which do not result in unrelated income are not subject to withholding.
If the seller is an insurance company, is the sale subject to withholding?
If the insurance company pays a tax to Alabama on its premium income, it is not subject to Alabama income tax, and withholding on the sale is not required.
If the seller is a financial institution, is the sale subject to withholding?
A financial institution, as defined in Section 40-16-1, generally is not subject to Alabama income tax so the withholding under Section 40-18-86 on the sale is not required if the seller is a financial institution subject to Alabamaâ€™s Financial Institution Excise Tax (FIET).
Does the withholding required under Code of Alabama 1975, Section 40-18-86, apply to the sale or transfer of timber located in Alabama by a nonresident of Alabama?
Under Alabama law, standing timber is real property. Once timber is severed from the stump, it becomes personal property. If title to the timber passes before it is severed from the stump, withholding under Code of Alabama 1975, Section 40-18-86 is required. If title to the timber does not pass until after it is severed from the stump, withholding is required only if the underlying land is sold with the timber.
If tax is withheld from a nonresident seller who is a partnership, S corporation, or limited liability company, how does the seller claim credit for the withholding?
The pass-through entity seller must allocate and pass through the withholding credit in the same manner as it passes through its income. It should be passed through each tier in multitiered situations until it is claimed. Each partner’s, shareholder’s, or member’s share of the withholding should be listed on the K-1 Form with a schedule showing how it was passed through and each partner, shareholder, and member should be provided a copy of the original withholding statements issued to the seller by the purchaser (Form WNR and Form WNR-V). The partner, shareholder, or member should claim credit for his or her share of the withholding on the Alabama income tax return, and attach a copy of the K-1 Form, the schedule showing how it was passed through, and a copy of the withholding calculation form issued to the seller by the purchaser (Form WNR). If the pass-through entity files a composite return, it may claim credit on the return, and attach the Form WNR. If some of the nonresident partners, shareholders, or members are not included on the composite return, credit may only be claimed for the portion of the withholding that is attributable to the partners, shareholders, or members who are included on the composite return.
If the seller is a corporation, how does it claim the withholding credit since the corporation income tax return does not have a line for tax withheld?
The payment of the amount withheld by the buyer is considered as an estimate paid on behalf of the nonresident seller. If the seller is a corporation, the amount paid by the buyer for the seller will be claimed on the seller’s Form 20C as an estimate payment.
Can a nonresident seller qualify as a deemed resident in order to be exempt from withholding, if he satisfies some, but not all of the listed conditions?
No. In order to qualify as a deemed resident, all of the qualifying conditions must be satisfied.
One of the conditions for a nonresident seller to be considered a deemed resident under Section 40-18-86, Code of Alabama 1975, is that the seller has filed Alabama income tax returns, or appropriate extensions, for the two income tax years immediately preceding the year of the sale. What if the sale occurs before the due date for the previous year’s income tax return?
If the seller or transferor has filed Alabama returns or appropriate extensions for the most recent two tax years whose original due dates have passed, that condition will be considered satisfied.
Is a single-member limited liability company (SMLLC), whose status is disregarded for federal income tax purposes, considered to be the seller for purposes of Section 40-18-86, Code of Alabama 1975?
The federal classification for income tax purposes applies for Alabama income tax purposes. Since Section 40-18-86 is the withholding of income tax, the federal classification also applies for income tax withholding purposes. Accordingly, a SMLLC whose status is disregarded for federal income tax purposes is not considered the seller for purposes of Section 40-18-86. Instead the owner of the SMLLC is considered the seller for purposes of the Alabama law.
Is a buyer required to inquire as to whether a LLC-seller is a “disregarded” entity?
Alabama law requires the buyer to withhold tax on the sale or transfer of Alabama real estate by a nonresident. In order to withhold, the buyer must determine if the “seller” is a nonresident. Inherent in this provision is the need to properly determine the “seller” of the property. As such, the buyer must inquire as to whether the LLC-seller is a disregarded entity in order to properly determine the seller.
If property is transferred to a relocation company, is the relocation company subject to the withholding requirements of Section 40-18-86, Code of Alabama 1975?
If the relocation company is a nonresident entity and is listed on the closing statement as the seller, then the relocation company is subject to the requirements of Section 40-18-86.
Is property that is sold or transferred by a nonresident as part of an installment transaction subject to the withholding requirements of Section 40-18-86, Code of Alabama 1975, and if so, how is withholding on the installment sale handled?
An installment sale made by a nonresident is subject to the requirements of Section 40-18-86. The initial payment of the withholding is calculated based on the purchase price less the installment note. If the seller wishes to base the withholding on the gain, the withholding is calculated on the gain that would be recognized as a result of the proceeds received at the time of the closing. The provisions of the law regarding the percentage to be withheld and the due date to file the payment voucher and make the withholding payment to the Alabama Department of Revenue apply to installment sales in the same manner as applicable to any other sale subject to withholding under Section 40-18-86. For subsequent payments, the withholding is calculated by applying 3 or 4 percent of the principal amount included in each payment, or if the gain is used to calculate withholding, by applying 3 or 4 percent of the amount of each principal payment which represents gain. The payment voucher must be filed and the payment remitted to the Department on or before the last day of the calendar month following the calendar month within which the cumulative amount withheld for the year, less any payments already made for the year, exceeds $100. If the cumulative amount withheld for the year, less any payments already made, does not exceed $100 for the calendar year, the buyer will file the payment voucher and remit the payment to the Department on or before the last day of the month following the end of the calendar year within which the tax was withheld.
Section 40-18-2, Code of Alabama 1975, imposes a tax on every nonresident individual receiving
income from property owned or business transacted in Alabama. Also, Section 40-18-14, states that the taxable income of a nonresident individual includes only income from property owned or business transacted in Alabama. An installment note, held by someone who is not in the business of holding installment notes, derived from the sale of investment real property or rental real property by a nonresident individual, would be intangible property that was acquired as income from property held in this state or as a result of business done in this state. “Business income” is defined in Section 40-27-1, Code of Alabama 1975, as income arising from transactions and activities in the regular course of the taxpayer’s trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade of business operations. Accordingly, interest that is attributable to the installment note in this situation is taxable for Alabama purposes. Is the interest from the installment note subject to the withholding requirements of Section 40-18-86, Code of Alabama 1975, ?
No. It is not subject to the withholding requirements of Section 40-18-86. However, if the buyer and seller agree, the buyer may withhold on the interest.