Are there any requirements I must meet if I am selling a relinquished property in other than my state of residence?
Q: I currently live in Tennessee, but have an investment property in Georgia. I am selling this property next week as part of a 1031 exchange and buying a new investment property near home. What will the state of Georgia require that I do?
A: Though the state of Georgia, along with the vast majority of others, follows the tax deferral treatment of the IRS, they do have a non-resident withholding requirement. Many states are now requiring that a mandatory non-resident withholding tax be paid when property is transferred to a buyer. The title company or attorney handling the closing is responsible for withholding a certain percentage of the gross sales price before a new deed may be recorded.
If you are doing a 1031 exchange, it maybe possible to obtain an exemption from the state----though in some states, you must apply prior to the closing of your relinquished property. Some of the states that require a non-resident withholding tax but allow a taxpayer to file for the exemption include:
- New York
- North Carolina
- Rhode Island
- South Carolina
- West Virginia
New Jersey also has a mandatory withholding tax for non-resident sellers but allows taxpayers to opt out by filling out an exemption request form at the closing.
If you received an exemption from the withholding tax, you must file a tax return in that state to report your exchange. (Warning: Some states refuse the exemption if the seller has not been filing a state return to report the income and expenses associated with the relinquished property.- i.e. properly treating it as investment property on their tax return.) As a non-resident titleholder of real property, here is a partial list of state forms that are required:
California Form 593-C; Colorado Form DR1083; Georgia Form IT-AFF3; Hawaii Form N289; Maine Form REW-5; Maryland Form MW506AE; New Jersey Form GIT/REP-3; New York Form NC-1099NRS; Rhode Island Form RI Form 71.3; South Carolina Form I-295; Vermont Form RW-171;
As in any exchange transaction, it is wise to seek counsel from your financial or legal advisor to be sure that you have successfully met all the 1031 requirements.