1031 Exchange Rules in Maryland

Last reviewed: June 2026. State rules change. Verify current forms before closing.

What Is Different in Maryland

Maryland combines a high withholding rate with a hard deadline. Nonresident sellers face withholding of 8.75% of the total payment at closing, and the deed will not record without either the payment or an exemption certificate. The 1031 exemption is real, but it is not a closing-table affidavit: you apply to the Comptroller on Form MW506AE, the application must be received at least 21 days before closing, and it must include a letter from your qualified intermediary stating the boot, if any. Maryland rewards investors who start the paperwork early and punishes everyone else.

Does Maryland Conform to IRC Section 1031?

Yes. Maryland follows the federal like-kind exchange rules for real property. A 1031 exchange is an IRS-approved way to sell investment property and buy replacement property without paying tax on the gain right away. If your exchange qualifies for federal deferral, Maryland defers its income tax too. New to exchanges? Start with our 1031 exchange guide.

Your replacement property can be in any state, and Maryland has no claw-back or annual tracking of deferred gain afterward.

Maryland Tax Rate on Real Estate Gains

Maryland's top state income tax rate is 6.5% for 2026, and counties add local income tax of up to roughly 3.2% on top. Combined, a large gain can face close to 9.7%. On a $500,000 gain, that can approach $48,500 of state and local tax in addition to the federal bill. A qualifying exchange may defer all of it.

Do not confuse the income tax rates with the withholding rates below. The 8.75% and 8.25% figures are withholding rates, designed to cover state plus local tax; your actual liability is computed on your return.

Nonresident Withholding at Closing

Under Md. Tax-General 10-912, settlement agents collect withholding from nonresident sellers at closing: 8.75% of the total payment for individuals and 8.25% for entities, reported on Form MW506NRS. Maryland's enforcement is structural: the clerk will not record the deed without the payment or a Comptroller-issued certificate.

On an $800,000 sale by a nonresident individual, that is $70,000 held back at closing unless your exemption certificate arrived in time.

How 1031 Exchangers Claim the Exemption: Form MW506AE

The exemption runs through Form MW506AE, the Application for Certificate of Full or Partial Exemption. The mechanics that matter:

• 21-day deadline. The application must be received by the Comptroller at least 21 days before the closing date. Received, not postmarked. Late applications are not processed in time, and there is no closing-table fallback.
• QI letter required. For a like-kind exchange, the application must include a letter from your qualified intermediary stating the amount of boot, if any. A qualified intermediary is the independent party that holds your sale proceeds during an exchange.
• Boot is the taxable amount. A fully deferred exchange supports a full exemption certificate. If you will receive boot, the Comptroller issues a partial exemption and withholding applies to the boot.

When the certificate arrives, deliver it to the settlement agent, and the closing proceeds without withholding. WealthBuilder 1031 prepares exchange documentation and the QI boot letter on a timeline that fits Maryland's 21-day rule.

Federal Taxes Still Apply

A Maryland exchange defers two layers: federal and state. Here is what a taxable sale looks like without an exchange, using round numbers.

Example: $1,000,000 sale of a Maryland rental. Original purchase $600,000, with $100,000 of depreciation taken, so the adjusted basis is $500,000 and the total gain is $500,000.

Figures are illustrative and rounded. Your rates depend on income, filing status, county, and basis. Run your own numbers with our 1031 exchange calculators, then confirm them with your tax advisor.

Risks and Things That Go Wrong in Maryland Exchanges

• Blowing the 21-day window. The most common Maryland mistake. If the MW506AE is not received in time, the settlement agent withholds 8.75% and you wait for a refund.
• No QI letter. An MW506AE without the intermediary's boot letter is incomplete. Line up your QI before you apply, not after.
• Boot surprises. Cash taken at closing or mortgage relief not offset with new debt or additional cash becomes boot, which the certificate process treats as the taxable amount.
• Confusing withholding rates with tax rates. The 8.75% is a collection mechanism, not your tax bill. Your actual Maryland liability is computed on your return; overwithholding comes back as a refund.
• Failed deadlines. The federal 45-day identification and 180-day completion rules apply with no state extensions. See the IRS rules for 1031 exchanges.
• Deferral is not elimination. The IRS and Maryland will tax the deferred gain when you eventually cash out. Plan the exit, not just the exchange.

Maryland 1031 Exchange FAQs

Does Maryland withhold on my sale if I do a 1031 exchange?
Not if the Comptroller issues a full exemption certificate in response to your MW506AE, which must be received at least 21 days before closing. Without the certificate, withholding applies even to an exchange.

What rate does Maryland withhold?
8.75% of the total payment for nonresident individuals and 8.25% for entities, collected via Form MW506NRS. The deed will not record without payment or a certificate.

What does the QI letter need to say?
It states the amount of boot in the exchange, if any. Boot is the taxable amount; a no-boot exchange supports a full exemption.

What if I will receive some boot?
The Comptroller issues a partial exemption certificate and withholding applies to the boot rather than the full payment.

Does Maryland track my deferred gain after the exchange?
No. Maryland has no claw-back rule and no annual reporting tied to deferred exchange gain.

Sources

• Md. Tax-General Section 10-912
• Comptroller of Maryland, 2026 Form MW506AE and Form MW506NRS
• COMAR 03.04.12.04
• Tax Foundation, State Individual Income Tax Rates and Brackets, 2026

Want to learn more?

Our 1031 exchange guide covers the full process from sale to replacement. Ready to start a Maryland exchange? WealthBuilder 1031 is attorney-owned, serves all 50 states, and charges a flat $1,000 fee. Start at WealthBuilder1031.com or call 888-508-1901.

This page does not constitute legal or tax advice. Consult your attorney and tax advisor about your specific situation.

Ready to start your Maryland 1031 exchange? WealthBuilder 1031 acts as your qualified intermediary for a flat $1,000 fee, $750 at your sale and $250 at your purchase. See our Maryland 1031 exchange services to get started.