Mississippi Nonresident Withholding (Form 89-386) and the 1031 Affidavit

Mississippi's 5% is paid by the seller, and only on a sale over $100,000

Section 27-7-308 reads differently from most state withholding statutes. In a sale of real property and associated tangible personal property which is not considered an exchange or trade, that results in gross proceeds greater than $100,000 paid by the buyer, and where the property is owned by a nonresident, the seller shall withhold from the proceeds and pay over to the Department of Revenue an amount equal to 5% of the amount realized. The 2015 amendment moved that duty from the buyer to the seller.

Two features follow. A seller who fails to pay does not cloud the buyer's title; the seller is personally liable to the Department for the amount. And a real estate licensee or closing agent involved in the sale has no duty to any party regarding compliance with the section and no liability for damages. The closing attorney will usually calculate and send the payment as a service, but the obligation is the seller's.

The payment can never exceed the net proceeds otherwise payable to the seller, and a corporation registered to do business in Mississippi is considered a resident, which takes most in-state entity sellers out of the rule. The statute sets no deadline on its face; the 89-386 affidavit is simply mailed to the Department with the payment.

A like-kind exchange is outside the statute because it is not a sale

The opening clause is the exemption. Section 27-7-308 applies to a sale which is not considered an exchange or trade of such property, and an exchange qualifying under section 1031 is by definition an exchange of property rather than a sale for cash. A simultaneous swap fits the words without argument.

A deferred exchange fits them too. Under Reg. section 1.1031(k)-1 a transfer of relinquished property followed by receipt of replacement property within the 45-day identification period and 180-day exchange period is a deferred exchange, and a qualified intermediary that acquires and transfers the properties under a written exchange agreement is treated as making the exchange with the taxpayer. The federal characterization as an exchange is what Mississippi's conformity to section 1031 under section 27-7-9(f), described on the state page, carries into the withholding statute.

Because there is no exemption form, the closing file should document the characterization: the exchange agreement, the assignment of the contract to the intermediary and the settlement statement showing proceeds paid to the intermediary. Mississippi does not publish an exchange affidavit, so the attorney's letter explaining why no payment accompanied the closing is the record if the Department asks, and the general rules on state withholding at closing apply to anything that is paid in error.

Form 89-386 turns 5% of price into 5% of gain, capped at net proceeds

When some gain will be recognized, the affidavit is the tool. Form 89-386 (Rev. 10/25) is sworn before a notary and states the seller, the property, the buyer, the total sales price and closing date, the gain to be reported on the Mississippi return from Schedule A, 5% of that gain, the net proceeds from Schedule B, and on line 8 the smaller of the two as the amount required to be withheld. Line 9 is the seller's promise to file all Mississippi returns due.

Schedule A subtracts selling expenses (attorney fees, commissions, termite and heating-and-air letter fees, other listed items) and tax basis from the sales price to reach gain. Schedule B subtracts the same expenses plus mortgages, liens and credit-line advances not made in contemplation of the sale; a lien placed within a year of closing is presumed to be in contemplation of the sale unless the seller swears otherwise. The affidavit is mailed to the Department in Jackson with the payment.

For a partial exchange the recognized gain, meaning the boot that is taxable after basis allocation, is what goes on Schedule A line 5. Hypothetical: a Tennessee resident sells a Gulfport strip center for $500,000, assigns $470,000 to the intermediary and keeps $30,000 that is entirely gain. Line 6 is $1,500 (5% of $30,000), net proceeds on line 7 are $30,000, and $1,500 is paid with the affidavit. Run your own numbers with your CPA, since the basis allocation between the exchanged and cashed-out portions decides how much of the $30,000 is gain.

The form says 5%, the 2026 rate is 4%, and the difference comes back on the return

House Bill 1 of 2025 rewrote Mississippi's individual rate schedule: 4.4% for 2025, 4% for calendar year 2026, then 3.75% in 2027, 3.5% in 2028, 3.25% in 2029 and 3% in 2030, in each case on taxable income over $10,000. Form 89-386 and the statute still use 5%, so even a correctly computed affidavit payment overshoots the 2026 tax on the same gain by a fifth.

The statute provides the remedy. A seller may file a claim for refund of the excess payment with an affidavit stating the gain required to be recognized, and the Department refunds the difference between the amount paid and the amount that should have been paid. In practice the nonresident return for the year of sale reports the recognized gain, claims the section 27-7-308 payment, and produces the refund; in the hypothetical above the tax at 4% is $1,200 and $300 comes back.

If a deferred exchange fails after closing, no Mississippi payment was made at the time because the transaction was an exchange when the deed passed, and nothing in the statute re-characterizes it retroactively. The gain is reported on the nonresident return for the year it is recognized under federal rules, with any estimated tax the Department's rules require; your choices after a failed exchange and the straddle-year election are decided on the federal side first.

What Mississippi does not ask for after the exchange

The statute also requires the seller to send the Department the federal information returns for real estate transactions, meaning the Form 1099-S data, so expect the sale to be matched against your return even though no tax was paid in. Beyond that, Mississippi has no annual report of deferred gain and no transfer tax declaration, so a nonresident who exchanges Mississippi property for a Delaware Statutory Trust holding property in another state has nothing further to file in Mississippi.

Keep the exchange agreement, the assignment, the settlement statement and any 89-386 with the year-of-sale records; the post-exchange checklist covers the federal documents that belong beside them.