What happens when your sellers are non-residents of South Carolina? We may have to withhold a portion of their gain!
In South Carolina, non-residents may be subject to withholding on their gain amounts. The South Carolina Code of Laws, Section 12-8-580, says that the purchasers are to withhold 7% of gain for individuals and 5% of gain for corporations that are considered a non-resident seller.
So, who is considered a non-resident seller?
- An individual whose permanent home is outside of South Carolina on the date of closing.
- A corporation incorporated outside of South Carolina (some exceptions may apply).
- A partnership whose principal place of business is located outside of South Carolina.
- A trust administered outside of South Carolina.
- An estate of a decedent whose permanent home was outside of South Carolina at the time death.
If there is more than one owner of the property, each owner’s residency will be determined separately.
Gee, that may affect a lot of people. Yes, but there are some exceptions!
This section will not apply to transactions to the extent the gain on the sale of a principal resident is excluded in according with the Internal Revenue Code Section 121.
Huh? As a rule of thumb, properties that were held as a primary residence for at least two of the last five years and were not used for business or rental purpose may be exempt or excluded up to a certain dollar amount. Generally, the amount excluded is typically $250,000.00 per seller. Withholding will apply to anything exceeding this amount.
NOTE: There are other instances and exceptions in which withholding will not apply (gifts and inheritance that are tax free under IRS Code Section 102, ‘like-kind’ exchanges that are tax deferred under IRS Code Section 1031, etc.). We will work with you to determine if any exceptions may apply.
So, what if we can’t find an exception and need to withhold 7% of the seller’s gain? How do you determine gain?
The burden is on the seller to provide a gain amount. An affidavit will be signed at closing providing the gain amount when applicable, as well.
Gain is calculated by using the seller’s cost basis and net proceeds. Typically, it is best to refer your seller to their CPA to help calculate their gain.
If you have an out of state seller that is selling real property, have them call our office to help determine whether or not withholding applies from the get-go. We want to help alleviate any surprises in reduction in proceeds as early as possible!