Effective November 1, 2025, a new Massachusetts regulation, 830 CMR 62B.2.4 (the Regulation”), requires a Settlement Agent to withhold and pay over to the Department of Revenue the estimated income tax on the gain from certain real estate sales.  The “Settlement Agent” is the closing attorney, title company, or escrow agent who conducts the closing and disburses the proceeds. 

The new Regulation applies primarily to non-resident individuals and corporations, not otherwise exempt, that are selling substantially all of their assets located in Massachusetts or who no longer have an ongoing business in Massachusetts, either directly or through a combined group. Transactions must be over $1,000,000 for the Regulation to apply. 

Much of the Regulation is dedicated to listing exemptions to its application.  These include exemptions for the following types of entities:

• Pass-through entities, e.g., partnerships and LLCs taxed as partnerships, S corporations and certain estates;
• REITs, provided the sale proceeds are distributed to REIT shareholders;
• Corporations with a continuing Massachusetts business presence;
• 501(c)(3) organizations provided the sale does not result in unrelated business taxable income;
• Certain insurance companies and financial institutions;
• Governmental bodies.

In addition to the foregoing, certain types of transactions are also exempt.  These include the following:

• Sales of a primary residence;
• Tax free contributions of real estate to a corporation that qualifies under Internal Revenue Code Section 351;
• A like-kind exchange that qualifies under Internal Revenue Code Section 1031;
• Most installment sales;
• A sale where the amount necessary to pay debts encumbering the property precludes payment of the withholding;
• A transfer of real estate in connection with a divorce.

The amount to be withheld can be calculated in one of two ways selected by the seller:

1.  An amount equal to the tax (using the tax rate applicable to the seller) on the gross sale price of the real estate, less the seller’s adjusted basis, less any deductible sale related expenses.
2. Four percent (4%) of the gross sale price for each seller, which is easier to calculate but can often result in a higher withholding amount. Note, if the seller is subject to the additional four percent (4%) Massachusetts tax on income over $1 million, this would increase withholding by a like amount. 

This memorandum is intended to provide general information of potential interest to clients and others. It does not constitute legal advice. The receipt of this memorandum by any party who is not a current client of the Business Law Group does not create an attorney-client relationship between the recipient and the firm. Under certain circumstances, this memorandum may constitute advertising under the Rules of the Massachusetts Supreme Judicial Court and the bar associations of other states.