Does Maryland recognize 1031 exchanges?
Yes. A Maryland 1031 exchange defers state tax because Maryland starts from federal adjusted gross income, and gain deferred under Section 1031 never enters federal AGI. The Comptroller’s Technical Bulletin 58 (December 29, 2025) says so directly: deferred gain is not in Maryland adjusted gross income and is not subject to the 2% additional tax on net capital gain.
Maryland adds no deadlines or forms of its own for a resident who completes a valid exchange. The work falls on nonresident sellers, who must deal with withholding at recording, and on anyone taking cash out, which Maryland taxes along with the IRS.
Why deferral is worth more in Maryland since 2025
The Budget Reconciliation and Financing Act of 2025 raised the top state rate to 6.5% and added a 2% tax on net capital gain for anyone with federal AGI over $350,000. With county income tax at 3.20% in most large jurisdictions, a resident selling an apartment building can pay about 11.5% to 11.7% of the gain to Maryland and the county, on top of federal tax.
A full exchange keeps the gain out of federal AGI, which also keeps it from pushing you over the $350,000 surtax line. A partial exchange with boot does not get that benefit for the boot, and if the boot alone takes federal AGI past $350,000, the 2% applies to the recognized gain.
Federal 1031 rules that apply in Maryland
The federal timeline controls. You have 45 days from the sale closing to identify replacement property in writing and 180 days, or your return due date if earlier, to close on it. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the money so you never receive it.
To defer all of the gain, buy a replacement worth at least the net sale price and reinvest every dollar of net cash. Cash you keep, or debt paid off and not replaced, is boot and is taxed by the IRS and by Maryland. Our page on 1031 exchange rules covers identification and boot in full, and the main 1031 exchange guide walks through an exchange from start to finish.
Maryland withholding at closing and how an exchange affects it
When a nonresident sells Maryland real property, the clerk collects tax before recording the deed: 8.75% for individuals and fiduciaries and 8.25% for entities, for sales after June 30, 2025. The rate applies to the total payment, meaning the net proceeds actually paid to the seller after the mortgage payoff and settlement costs.
An exchange does not switch withholding off on its own. A nonresident who is exchanging applies to the Comptroller on Form MW506AE for a certificate of full or partial exemption. The 2026 form lists a Section 1031 like-kind exchange as a qualifying situation, requires a letter from the qualified intermediary and requires you to state any boot, which is taxable. The Comptroller recalculates the amount from your documents.
- File MW506AE so it arrives at least 21 days before closing. Applications without a closing date are not processed.
- Attach the intermediary’s letter and an estimated settlement statement showing what goes to the intermediary and what, if anything, comes to you.
- If the sale is $1,500,000 or more, a tentative refund is not available, so getting the certificate right before closing matters more.
- An entity formed outside Maryland and not registered with SDAT is a nonresident entity, even if its members live in Maryland.
Does Maryland have a 1031 clawback?
No. Maryland has no rule like California’s Form FTB 3840 or Oregon’s Form OR-24 that tracks deferred Maryland gain after you exchange into another state. If you sell a building in Annapolis and buy in Delaware or Florida, Maryland requires no annual filing.
That does not mean the gain escapes Maryland in every case. While you remain a Maryland resident, Maryland taxes your income from anywhere, so a later taxable sale of the out-of-state replacement is taxed by Maryland in the year you sell. If you have moved away by then and the replacement is outside Maryland, Maryland has no rule that reaches back for the gain you deferred.
Does Maryland regulate qualified intermediaries?
Maryland is not one of the nine states with a law regulating exchange facilitators, which are California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. A Maryland intermediary is not required by state law to post a fidelity bond or carry errors and omissions coverage.
That puts the checking on you. Your exchange funds can be the largest balance you ever leave with a company you have just hired.
- Ask for proof of a fidelity bond and errors and omissions coverage, and the amounts.
- Ask whether your money sits in a separate account in your name and whether withdrawals need your signature too.
- Ask whether the intermediary has issued MW506AE letters before and how quickly.
- Confirm it is not your attorney, CPA, employee or broker from the last two years, which would disqualify it federally.
Exchanging through an LLC or partnership in Maryland
Many Maryland apartment buildings are owned by an LLC taxed as a partnership, and in that case the LLC is the taxpayer that sells and must buy the replacement. The members cannot each go their own way inside one exchange without restructuring first, which needs planning well before a contract is signed.
For withholding, the LLC is the transferor. If it was formed in Maryland or is registered with SDAT, it is a resident entity and no withholding applies at recording. If it was formed elsewhere and never registered, it is a nonresident entity and faces 8.25% unless it obtains a MW506AE certificate. Whether to register a foreign LLC with SDAT before the sale is a question for your attorney.
The 2% tax on net capital gain is never paid by the entity. Any boot the LLC recognizes flows through on Schedule K-1, and each member whose federal AGI is over $350,000 pays the 2% on their share, so members should plan estimated payments.
Common 1031 exchange paths for Maryland owners
Maryland to Maryland suits owners trading up inside the Baltimore-Washington corridor, for example selling small buildings in Baltimore City and buying a larger one in Anne Arundel or Howard County. It also lets a seller compare property tax rates directly, from $2.36 per $100 in Baltimore City to about $1.08 in Anne Arundel on SDAT’s fiscal 2027 table.
Maryland to another state works well because there is no clawback. An owner who wants out from under the Montgomery or Prince George’s rent caps can buy in Pennsylvania, the Carolinas or Florida and file nothing extra with Maryland.
Out-of-state owners exchanging out of Maryland property are the group most affected by state rules, because they face 8.75% or 8.25% withholding at recording unless the MW506AE certificate is in place.
Worked example: a Maryland exchange with boot
A married couple in Columbia sells a 22-unit building in Howard County for $2,000,000. After $100,000 of selling costs and an adjusted basis of $900,000, the gain is $1,000,000. They have $400,000 of other taxable income, and Howard County’s income tax rate is 3.20%.
Without an exchange, Maryland bracket tax on the gain is $62,000, the 2% tax on net capital gain is $20,000 and the county tax is $32,000, for $114,000 to Maryland and Howard County on top of the federal bill. With a full exchange into a replacement of at least $1,900,000 and all net cash reinvested, all $114,000 is deferred, along with the federal tax.
Now change one fact. The same building is owned by a couple living in Virginia, who take $100,000 in cash at closing and send the rest to the intermediary. That $100,000 is boot. If the Comptroller’s certificate bases withholding on the boot, the amount at 8.75% is $8,750, instead of 8.75% of everything paid out. The couple still files a Maryland nonresident return to report the $100,000 of recognized gain.
| Item | Amount |
|---|---|
| Sale price | $2,000,000 |
| Total gain | $1,000,000 |
| Maryland bracket tax on gain | $62,000 |
| Maryland 2% tax on net capital gain | $20,000 |
| Howard County income tax (3.20%) | $32,000 |
| Maryland and county tax deferred by a full exchange | $114,000 |
| Withholding on $100,000 boot at 8.75% | $8,750 |
Timeline tips for a Maryland exchange
Work backward from the closing date. The MW506AE deadline sits three weeks before closing, and the 45-day identification clock starts the day you close.
- Hire the intermediary and sign the exchange agreement before you sign the sale contract.
- Nonresidents: file MW506AE at least 21 days before closing, with the intermediary’s letter.
- Ask the title company to confirm how withholding will be handled at recording.
- If you sell late in the year, extend your return so the due date does not cut the 180 days short.
- Keep the exchange file with the replacement property’s records for the day you sell it.
Selling a Maryland apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Maryland. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the contract assignment and can set a closing date that leaves room for the MW506AE filing and for finding your replacement.
For the tax without an exchange, see Maryland capital gains tax on real estate. The 1031 exchange calculator runs the federal side with your numbers.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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