1031 Exchange in Maryland
Maryland conforms to the federal like-kind exchange rules, so a properly structured 1031 exchange defers Maryland income tax on the same timeline as federal tax. Maryland does not have a special 1031 clawback provision. The key state-specific issue is Maryland's nonresident withholding on real property sales — 8.75% of the total payment for nonresident individuals as of July 1, 2025 — from which a valid 1031 exchange can be exempted by obtaining a Certificate of Full or Partial Exemption (Form MW506AE) before settlement.
Fast Facts
- State Income Tax on Capital Gains
- Maryland taxes capital gains as ordinary income at its graduated rates, which top out at 6.50% on Maryland taxable income over $1,000,000 ($1,200,000 for joint filers). County income tax (2.25%–3.30%) applies on top. An additional 2% surtax applies to net capital gain for individuals with federal AGI over $350,000.
- Conforms to Federal 1031
- Yes. Maryland recognizes federal like-kind exchanges, so a valid federal 1031 deferral is generally honored for Maryland income tax on the same timeline.
- Clawback Rule
- No. Maryland does not impose a special add-back or clawback of deferred gain when Maryland property is exchanged into out-of-state replacement property.
- Nonresident Withholding
- 8.75% of the total payment for nonresident individuals (8.25% for nonresident entities) as of July 1, 2025. A 1031 exchange can be exempted with a Certificate of Full or Partial Exemption (Form MW506AE) filed at least 21 days before settlement.
- Transfer & Recordation Tax
- Maryland imposes a 0.5% state transfer tax on the consideration (0.25% for first-time Maryland homebuyers). County recordation tax and, in most jurisdictions, local transfer tax also apply.
How Maryland Treats a 1031 Exchange
Maryland’s income tax starts from your federal income, so the state generally follows federal treatment of a like-kind exchange: if gain is deferred federally under IRC Section 1031, it is deferred for Maryland purposes as well. There is no separate Maryland election and no separate Maryland deadline — the federal 45-day identification window and 180-day closing window control, and the exchange is reported federally on IRS Form 8824.
Unlike a handful of states (such as Oregon and California) that track deferred in-state gain and recapture it when you eventually cash out of out-of-state replacement property, Maryland does not have a 1031 clawback statute. Maryland taxes the gain when it is finally recognized on a taxable transaction, under the ordinary sourcing rules, without a special add-back tied to the original Maryland property.
The state-specific friction point in Maryland is not the deferral itself — it is withholding at closing. Maryland requires an income tax withholding payment to accompany the deed when a nonresident sells or exchanges Maryland real property. Because a 1031 exchange defers gain rather than realizing it, Maryland allows a nonresident exchanger to apply for an exemption from that withholding, but the exemption must be obtained before settlement.
Legal and Tax Considerations
State Income Tax on Capital Gains
Taxed as ordinary income at graduated rates topping out at 6.50%, plus county income tax of 2.25%–3.30%. A 2% surtax applies to net capital gain for individuals with federal AGI over $350,000.
Conforms to Federal 1031
Yes. Maryland recognizes the federal like-kind exchange deferral for state income tax on the same timeline.
Clawback
No. Maryland has no special clawback of deferred gain on out-of-state replacement property.
Nonresident Withholding
8.75% (individuals) / 8.25% (entities) of the total payment, as of July 1, 2025. Exempt a 1031 exchange via Form MW506AE filed at least 21 days before settlement.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges)
- Maryland Form MW506AE (Application for Certificate of Full or Partial Exemption) — for a nonresident exchanger, filed at least 21 days before settlement
- Cover letter from the Qualified Intermediary identifying the transferor(s), the property, and the QI's role (required by the Comptroller for 1031 exemption applications)
- Qualified Intermediary exchange agreement and assignment documents
- Complete closing/settlement statements for both the relinquished and replacement properties
Clawback Rule
None
Official References
- Maryland Tax Alert — Rate Change to Withholding on Sale of Real Property by a Nonresident (8.75% individuals / 8.25% entities)
- Comptroller of Maryland — Withholding for Nonresident Sale of Property
- Maryland Form MW506AE — Application for Certificate of Full or Partial Exemption
- Comptroller of Maryland — Maryland Income Tax Rates and Brackets
- IRS Form 8824 — Like-Kind Exchanges
Maryland Tax Rates and Closing Costs in Context
Maryland does not apply a separate, preferential rate to capital gains. Gain from selling investment real estate is folded into ordinary Maryland taxable income and taxed at the state’s graduated personal income tax rates. Under the 2025 Budget Reconciliation and Financing Act, the top marginal state rate rose to 6.50% on Maryland taxable income over $1,000,000 ($1,200,000 for joint filers), with a 6.25% bracket applying between $500,001 and $1,000,000 ($600,001–$1,200,000 for joint filers). On top of the state rate, every Maryland resident also pays a local (county or Baltimore City) income tax, which ranges from 2.25% up to 3.30% for tax year 2025.
Maryland also layers an additional 2% surtax on net capital gain for individuals and fiduciaries whose federal adjusted gross income exceeds $350,000, effective for tax year 2025. Because a 1031 exchange defers the recognition of gain, it can defer both the ordinary-rate tax and this surtax on the deferred amount — a meaningful reason Maryland investors use exchanges rather than selling outright.
On the transaction side, Maryland is not a low-cost state. It imposes a 0.5% state transfer tax on the consideration under Title 13 of the Tax-Property Article (reduced to 0.25% for first-time Maryland homebuyers, paid by the seller). Separately, each county sets its own recordation tax rate, and most counties and Baltimore City also impose a local transfer tax. A like-kind exchange does not eliminate these transaction taxes — they apply to the transfer of a deed regardless of how the gain is treated for income tax — so investors should budget for state transfer tax plus county recordation and transfer taxes at each closing.
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
For a delayed exchange, you must set up a Qualified Intermediary (QI) before you close on the relinquished Maryland property. You cannot take actual or constructive receipt of the sale proceeds — the QI holds the funds. If you are a nonresident, the QI will also help you apply for the Maryland withholding exemption before settlement.
- 2
Apply for the Maryland Withholding Exemption (Nonresidents)
If you are a nonresident of Maryland, file Form MW506AE (Application for Certificate of Full or Partial Exemption) with the Comptroller at least 21 days before settlement, together with a cover letter from your QI. This lets you avoid the 8.75% (individual) / 8.25% (entity) withholding on the deferred portion; any boot remains subject to withholding.
- 3
Sell the Relinquished Property
Close the sale with the QI receiving the proceeds. Report the disposition on federal Form 8824. State and county transfer and recordation taxes on the deed still apply at closing even in a like-kind exchange.
- 4
Identify Replacement Property Within 45 Days
You have 45 calendar days from the sale of the relinquished property to identify potential replacement property in writing, following the federal identification rules (such as the three-property rule or 200% rule).
- 5
Close on Replacement Property Within 180 Days
You must acquire the replacement property within 180 calendar days of the sale (or your tax-return due date including extensions, if earlier). Only real property held for investment or business use qualifies under post-2017 federal law. Report the completed exchange on federal Form 8824.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Frequently Asked Questions
Yes. Maryland's income tax starts from your federal income, so a properly structured federal 1031 exchange defers Maryland income tax on the same timeline as federal tax. There is no separate Maryland election or deadline — the federal 45-day identification and 180-day closing windows apply, and the exchange is reported on IRS Form 8824.
No. Unlike states such as Oregon and California, Maryland does not have a special clawback statute that recaptures deferred Maryland gain when you exchange Maryland property into out-of-state replacement property. Maryland taxes gain when it is finally recognized under the ordinary rules, without a separate add-back tied to the original property.
Maryland requires an income tax withholding payment to accompany the deed when a nonresident sells Maryland real property — 8.75% of the total payment for nonresident individuals and 8.25% for nonresident entities, effective July 1, 2025. A nonresident doing a 1031 exchange can apply for a Certificate of Full or Partial Exemption on Form MW506AE, filed with the Comptroller at least 21 days before settlement along with a cover letter from the Qualified Intermediary. Any boot (non-like-kind proceeds) remains subject to withholding.
Maryland taxes capital gains as ordinary income at graduated rates topping out at 6.50%, plus county income tax of 2.25% to 3.30%. Individuals with federal AGI over $350,000 also owe an additional 2% surtax on net capital gain. So any recognized gain — including boot in a partial exchange or gain from a failed exchange — is taxed at the applicable ordinary state rate, the county rate, and potentially the 2% surtax. Check the Comptroller's rate charts for current brackets.
Yes. A like-kind exchange defers income tax but does not exempt the deed transfer from transaction taxes. Maryland imposes a 0.5% state transfer tax on the consideration (0.25% for first-time Maryland homebuyers), and each county sets its own recordation tax, with most counties and Baltimore City also imposing a local transfer tax. Budget for these at each closing.
Related Guides
- What Is a 1031 Exchange? — the complete federal framework, deadlines, and rules
- 1031 Exchange by State — compare Maryland with other states’ rules and clawback provisions
- California-Lexington Park, MD
- Cumberland, MD
- Hagerstown-Martinsburg, MD
References
Official References
- Maryland Tax Alert — Rate Change to Withholding on Sale of Real Property by a Nonresident
- Comptroller of Maryland — Withholding for Nonresident Sale of Property
- Maryland Form MW506AE — Application for Certificate of Full or Partial Exemption
- Comptroller of Maryland — Maryland Income Tax Rates and Brackets
- IRS Form 8824 — Like-Kind Exchanges
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.