1031 Exchange in Maryland: 8.75% Withholding, County Tax and DSTs

Maryland withholds 8.75% at settlement from nonresident sellers unless Form MW506AE clears the exchange

Under Tax-General §10-912, a deed transferring Maryland real property owned by a nonresident cannot be recorded until the settlement agent pays the Clerk or SDAT a withholding amount: 8.75% of the "total payment" for a nonresident individual on sales after June 30, 2025 (up from 8% once the 2025 budget raised the top state rate) and 8.25% for a nonresident entity, meaning one not formed in Maryland or not registered with SDAT. Total payment is the price less mortgage payoffs and closing costs shown on the settlement statement, not the gain.

The Comptroller's withholding guide answers the exchange question directly: file Form MW506AE, Application for a Certificate of Full or Partial Exemption, "at least 21 days before the settlement date," and the form "recognizes like-kind exchanges under §1031." The Comptroller then issues Certificate MW506E, which the seller hands to the title company and which accompanies the deed; a partial certificate covers exchanges with boot, and the reduced amount is paid with Form MW506NRS.

If the application is late, the Comptroller "cannot guarantee" a certificate in time and may return the package. Money withheld from an exchange is money the qualified intermediary never receives, and the tentative refund on Form MW506R is available only 60 days after settlement and, since the 2025 budget act, not at all when the sales price is $1.5 million or more; those sellers wait for the annual return.

• Residency is tested owner by owner, so a Maryland-resident co-owner is exempt on her share while an out-of-state co-owner is withheld on his.
• A deed conveying only a ground rent is outside §10-912, because it does not change ownership on SDAT's assessment books.

Maryland's 2% capital gains surcharge and 6.5% top bracket make an outright sale expensive

The Budget Reconciliation and Financing Act of 2025 added two state brackets for tax years beginning after December 31, 2024: 6.25% on Maryland taxable income from $500,001 to $1,000,000 for single filers ($600,001 to $1,200,000 joint) and 6.5% above. It also imposed an additional 2% tax on net capital gains included in Maryland AGI for anyone whose federal AGI exceeds $350,000, a threshold that does not change with filing status.

Technical Bulletin 58 lists the exceptions: a primary residence sold for under $1.5 million, assets in retirement accounts, breeding livestock for full-time farmers, land under a conservation, agricultural or forest easement, property expensed under §179, and nonprofit affordable housing. A rental townhouse, a Columbia office condo or a Salisbury shopping center is on none of those lists, so its gain draws the surcharge in full, reported on Form 502CG.

The bulletin's final section is the one exchangers care about: because Maryland AGI begins with federal AGI, "if the gain from a transaction is not included in the FAGI then it is not included in Maryland adjusted gross income." A properly completed exchange, meeting the eligibility requirements, therefore sidesteps the new brackets and the surcharge together.

Maryland's county piggyback tax rides on top of the state rate, and nonresidents pay 2.25% instead

Every Maryland county and Baltimore City levies a local income tax collected on the state return, set by the jurisdiction where you live on the last day of the year. For 2026 the rates run from 2.25% in Worcester County to 3.30% in Dorchester and Kent, with 3.20% in Baltimore City, Montgomery, Prince George's, Howard and most of the metro counties, and tiered schedules in Anne Arundel (2.70% to 3.20%) and Frederick (2.25% to 3.20%).

A Bethesda landlord who sells outright can therefore face 6.5% state tax, the 2% surcharge and 3.2% county tax on the same dollar of gain. A nonresident who recognizes gain on Maryland property pays the state brackets plus a special nonresident rate of 2.25% in place of a county rate, which is also why the withholding formula uses the lowest county rate plus the highest state rate.

State and county transfer taxes and recordation tax apply to an exchange deed like any other

Maryland's state transfer tax is 0.5% of consideration, cut to 0.25% and shifted entirely to the seller when the buyer is a first-time Maryland homebuyer taking a principal residence. Counties add their own: Baltimore City 1.5%, rising to 2.1% on transactions over $1 million; Prince George's 1.4%; Howard 1.25%; Baltimore County 1.5%; Anne Arundel 1.0%, or 1.5% at $1 million and above; Montgomery on a tiered scale up to 1.0%; and none at all in Calvert, Carroll, Frederick, Somerset and Wicomico.

A county recordation tax, quoted per $500 of consideration and set county by county, is charged when the deed is recorded. Buyer and seller commonly split transfer and recordation taxes by contract, and nothing about an exchange changes that; the seller's share is a cost of sale on the settlement statement and the buyer's share is paid by whoever acquires the Maryland property.

Maryland decouples from bonus depreciation, so a Maryland basis follows you on Form 500DM

Administrative Release 38 requires Maryland taxable income to be computed "as if the taxpayer elected not to use" the federal special depreciation allowance under §168(k), and it limits §179 expensing for non-manufacturers to $25,000 with a $200,000 phase-out. The add-back is made in the year the federal deduction is claimed and recovered ratably over later years on Form 500DM, filed every year for the life of the asset.

An investor who took bonus depreciation on a cost-segregated apartment building therefore has a higher Maryland basis than federal basis in the relinquished property, a smaller Maryland gain, and a different Maryland basis to carry into the replacement property or DST interest. The release says nothing about like-kind exchanges specifically, so have your CPA carry the pro forma federal return that AR 38 requires through the exchange.

Ground rents and SDAT's triennial cycle: two Maryland items to settle before listing

Thousands of Baltimore row houses and older properties elsewhere sit on ground leases: the owner holds a leasehold and pays a small annual ground rent to the holder of the reversion. Under SDAT's Ground Rent Registry, only registered ground rents are legally collectible, and SDAT runs a redemption process by which the leasehold owner can buy out the reversion and convert the property to fee simple before an exchange sale.

Maryland reassesses each property once every three years, one-third of every county each year, and phases assessment increases in over three years; a sale does not trigger an off-cycle reassessment. The Homestead credit that caps annual increases applies only to owner-occupied principal residences, so investment property carries the full phased increase, one of the numbers a buyer of Maryland replacement property should model.