Section 40-18-86, Code of Alabama 1975, provides for income tax withholding at a rate of 3% or 4% on sales or transfers of real property and associated tangible personal property by nonresidents of Alabama. This Code Section is applicable to any sale or transfer occurring on or after August 1, 2008. For the purposes of this Code Section, nonresidents include individuals, trusts, partnerships, corporations, limited liability companies, limited liability partnerships, and unincorporated organizations. This law does not apply to residents of Alabama, so there is no requirement for any of the forms applicable under Section 40-18-86 to be completed on the sale or transfer of property by a resident.
The rate of withholding is 3% or 4% of the purchase price. An alternative for calculating the withholding is to use the seller’s gain. In order to apply the withholding to the gain, the seller must complete Form NR-AF2 (Affidavit of Seller’s Gain) attesting to the amount of the taxable gain. The seller is responsible for the calculation of the gain. The completed Form NR-AF2 must be sent to ALDOR. A copy of this form along with an explanation of the cost basis and expenses should be kept with the closing file. The buyer may rely on the seller’s affidavit with the above mentioned explanation 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 calculated amount for the withholding is more than the cash received at closing, the buyer must withhold and remit only the net proceeds otherwise payable to the seller.
There are a number of exemptions to the withholding requirement.
FORMS AND INSTRUCTIONS
Complete Package
Withholding Requirements for Sales or Transfers of Real Property by Nonresidents Package (includes Act 2008-504, FAQs and Forms)
Updated: January 10, 2014
Affidavit and Certificate of Exemption Forms
Form NR-AF1 Updated:6/11/2013 | Affidavit of Seller’s Residence |
Form NR-AF2 Updated:6/11/2013 | Affidavit of Seller’s Gain |
Form NR-AF3 Updated:1/10/2014 | Seller’s Certificate of Exemption |
Form WNR Updated:6/11/2013 | Withholding on Sales or Transfers of Real Property and Associated Tangible Personal Property by Nonresidents |
Payment Voucher
Form WNR-V Updated:9/11/2020 | Withholding on Sales or Transfers of Real Property and Associated Tangible Personal Property by Nonresidents Payment Voucher |
For questions and additional information, contact ALDOR at 334-242-1300.
I've got some chops in real estate tax laws, particularly those concerning Alabama's Code of 1975. The specific section you mentioned, 40-18-86, dives into income tax withholding rates for nonresidents involved in property sales or transfers in Alabama. This part kicks in from August 1, 2008, and addresses the withholding of 3% or 4% on the sale or transfer of real property and related tangible personal property.
Now, this withholding applies to nonresidents, a category that encompasses a wide range of entities, from individuals to corporations, trusts, partnerships, LLCs, LLPs, and unincorporated organizations. For residents of Alabama, though, this rule doesn't come into play, meaning no need for the forms stipulated under Section 40-18-86 when they sell or transfer property.
The withholding rate, as you mentioned, is pegged at 3% or 4% of the purchase price. But here's where it gets interesting: an alternate method allows the calculation of withholding based on the seller's gain. To make this happen, the seller must complete Form NR-AF2, the "Affidavit of Seller’s Gain," affirming the taxable gain amount. The responsibility for calculating this gain falls squarely on the seller's shoulders.
Once the NR-AF2 form is completed, it needs to wing its way to the Alabama Department of Revenue (ALDOR). The seller should also retain a copy of this form, coupled with an elucidation of the cost basis and expenses, within the closing file.
When it comes to the buyer, they can rely on the seller's affidavit and explanation regarding the gain unless they're privy to information, at the time of closing, indicating falsehoods in the affidavit. The buyer isn't obligated to delve into investigating the seller's statements. However, if the calculated withholding surpasses the cash received at closing, the buyer must withhold and remit only the net proceeds otherwise payable to the seller.
Of course, as with many legalities, there are exemptions to this withholding requirement. The FAQs and forms, including NR-AF1 (Affidavit of Seller’s Residence), NR-AF3 (Seller’s Certificate of Exemption), and others, play pivotal roles in navigating this process.
For those digging deeper into this labyrinthine system, the contact number for ALDOR is 334-242-1300. If you need more granular information or have specific queries, they're your go-to folks.
