Attention to owners of real estate in the Commonwealth (and the title companies and other professionals who advise them), the Massachusetts Department of Revenue (the “DOR”) recently adopted a new “millionaire’s tax” via 830 CMR 62B.2.4 (the “Regulation”). The Regulation imposes new withholding tax requirements on transfers of real estate within the Commonwealth involving a gross sales price equal to or exceeding $1 million, adding the Commonwealth to the sizable list of states that have a tax withholding requirement for non-exempt real estate sales. The Regulation applies withholding obligations to all real estate transfers occurring on and after November 1, 2025, regardless of whether the property is commercial or residential, unless the transferor otherwise qualifies for an exemption under the Regulation. This DE Insight will discuss those exemptions in more detail.
Applicability of the New Tax Rules
In real estate transactions where the gross sales price is equal to or greater than $1 million, the settlement agent must file a withholding return, remit the withholding payment, if any, and provide a “Transferor’s Certification” (as described in more detail in the Regulation), along with the fully executed settlement statement to the DOR within 10 days of the closing of the transaction. Though it is the settlement agent that submits the Transferor’s Certification, it is the seller’s responsibility to fully and accurately complete the form and deliver it to the settlement agent. The filings and remittance of the withholding payment will be completed via electronic filing on the MassTaxConnect portal. To the extent that no withholding payment is required due to the availability of an exemption, a Transferor’s Certification and return must nonetheless be filed by the settlement agent. The settlement agent must also provide a copy of the filed return and Transferor’s Certification to the transferor on or before the due date for the settlement agent’s filing with the DOR, along with a receipt for the payment, if one is made.
Exemptions to the Tax Rules
As noted above, the Regulation exempts certain transfers to the extent that the gain would not be recognized under state law, such as: the transfer of a principal residence, transfers between spouses made pursuant to a divorce decree or settlement, transfers that qualify for nonrecognition under Internal Revenue Code (IRC) Section 351, and transfers that qualify as a tax-free reorganization under IRC Section 368. Other exempt transferors include pass-through entities, publicly traded partnerships, resident trusts or estates with a resident decedent, certain tax-exempt entities, and U.S. and state government entities (and their political subdivisions and agencies). A transferor may certify to the settlement agent that a specific exemption is applicable so that no withholding payment must be made with the filing.
In the case of like-kind exchanges under IRC Section 1031, withholding is generally not required to the extent of the gain being deferred. On the Transferor’s Certification, the transferor must identify the amount of gain being deferred and consent to personal jurisdiction in the state for the collection of the tax upon the realization of the gain. If a transfer that was intended to meet the like-kind exchange requirements at closing subsequently fails to do so, the transferor must notify the state within 10 days and remit the applicable withholding tax by the due date for the next estimated payment. For installment sales, the transferor may elect to have the withholding tax apply only to the initial payment amount rather than the entire amount. That election is made on the Transferor’s Certification as well, along with a statement consenting to personal jurisdiction in the state for the collection of taxes due on the subsequent installment payments. Note that if no exemption applies, or only a partial exemption applies, the transferor in the Transferor’s Certification must provide the necessary information to determine the withholding amount.
Calculating the Withholding
For individuals, the tax rate for calculating the withholding amount ranges from 4%-5%, depending on whether the transferor chooses to calculate the withholding based on the gross sales amount or the alternative withholding amount, which is an amount based on the transferor’s estimated net gain (as such capitalized terms are further defined in the Regulation). Additionally, if the gross sales price or estimated net gain (as applicable) exceeds the surtax threshold for personal income taxpayers, an additional 4% on the amount over the surtax threshold must be withheld and paid to the DOR. For corporations, the tax rate for calculating the withholding amount ranges from 4%-8%, depending on whether the transferor chooses to calculate the withholding based on the gross sales amount or the alternative withholding amount.
Conclusion
With the November 1, 2025, effective date nearly here, owners and indirect investors in Massachusetts real estate should proactively assess upcoming transactions to determine if withholding will apply. Early consultation with legal and tax advisors can help identify available exemptions, avoid filing pitfalls, and ensure compliance before closings occur.
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