Update: Effective January 1, 2011, Delaware To Require Withholding of Income Tax on Sale or Exchange of Delaware Real Estate by Nonresidents

December 2010Newsletters In the Zone

House Bill No. 349, signed by Delaware’s Governor on June 11, 2010, and effective for tax periods commencing after December 31, 2010, requires every nonresident individual, nonresident pass-through entity and nonresident corporation that sells or exchanges Delaware real estate to declare and pay their estimate of the tax due on such transaction prior to the recording of the deed.

To implement the new law, the Delaware Division of Revenue has proposed a new form “Return of Declaration of Estimated Income Tax – Real Estate Tax” that would need to be completed and submitted to the Recorder of Deeds, along with the estimated tax reported due, at the time of recording of the deed. The proposed declaration form as currently drafted does offer the tax preparer completing the form the option to declare the transferor/seller presently has insufficient information to determine if the sale or exchange is subject to withholding, with the caveat that once sufficient information is available, payment of tax may be due and the appropriate return must be timely filed. For purposes of the new law, “nonresident individual” is an individual who is not a resident of Delaware for the individual’s entire tax year, “nonresident pass-through entity” is a pass-through entity having one or more members who are nonresident individuals or nonresident corporations, and “nonresident corporation” is a corporation not organized under Delaware law and not qualified or registered with the Delaware Secretary of State to do business in the state. With respect to nonresident pass-through entities, the requirement under the new law is that such entity cause to be completed and filed with the Recorder of Deeds the required declaration form, together with any tax estimated due, for and on behalf of each of its nonresident members. Any estimated tax that is remitted in compliance with this new law shall be deemed to have been paid to the Delaware Division of Revenue on behalf of the nonresident transferor, and such nonresident transferor shall be credited as having made such payment on the date remitted to the Recorder of Deeds.

The statute expressly provides that neither the transferee, title insurance producer or insurer, closing attorney, lending institution, nor the real estate agent or broker in a transaction subject to this new law, shall be liable for any amounts required to be collected and paid under the statute.

For more information, please contact J. Breck Smith at 302.622.4208 or [email protected].