Maryland capital gains tax on real estate is really three layers: a state rate of up to 6.5%, a 2% surtax on net capital gains that started in 2025 for households with federal AGI over $350,000, and a county income tax of up to 3.30%. A properly structured 1031 exchange in Maryland defers all three, plus the federal tax, and it is also the cleanest way for a nonresident seller to keep the Comptroller from withholding 8.75% of the sale price at settlement.
Reviewed by Jon Hilley, CEO & Founder of 1031 Specialists. Last reviewed September 29, 2026.
| State tax on real estate gains | Taxed as ordinary income at 2% to 6.5%, plus an additional 2% tax on net capital gains when federal AGI exceeds $350,000 |
|---|---|
| Long-term capital gains treatment | No reduced rate; the 2% capital gains tax applies from tax year 2025 with limited exclusions (investment property is not excluded) |
| Local income tax | 2.25% to 3.30% by county; 3.20% in Montgomery, Prince George's, Baltimore County and Baltimore City for 2026. Nonresidents pay a 2.25% special nonresident tax instead |
| Nonresident withholding at closing | 8.75% of the total payment for individuals and 8.25% for entities (sales after June 30, 2025) |
| Withholding form | MW506NRS filed at settlement; exemption certificate requested on Form MW506AE at least 21 days before closing |
| Transfer or conveyance tax (a 1031 does not defer it) | State transfer tax 0.5% plus county transfer and recordation taxes (Baltimore City: 1.5% transfer, $5.00 per $500 recordation) |
| Clawback on out-of-state replacement property | None |
| Conforms to Section 1031 | Yes. Maryland starts from federal AGI, so deferred gain stays out of Maryland income |
Table of contents
- How much is capital gains tax on real estate in Maryland?
- Maryland tax on a $300,000 gain: worked example
- The 2% Maryland capital gains tax and your exchange
- Maryland nonresident withholding (MW506NRS) and the 1031 exemption
- Maryland transfer and recordation taxes
- Maryland conformity and clawback rules
- Moving into or out of Maryland
- Where Maryland 1031 exchanges happen
- Federal 1031 rules that apply in Maryland
- Maryland 1031 exchange mistakes to avoid
- Start your Maryland exchange with 1031 Specialists
- Frequently asked questions
- Sources
How much is capital gains tax on real estate in Maryland?
Maryland has no special capital gains rate. Gain from selling a rental or commercial building lands in Maryland taxable income and is taxed on the regular schedule, which since 2025 tops out at 6.25% above $500,000 of taxable income ($600,000 joint) and 6.5% above $1,000,000 ($1,200,000 joint).
On top of that, the 2025 Budget Reconciliation and Financing Act added a 2% tax on net capital gains for anyone whose federal adjusted gross income is over $350,000. The Comptroller's guidance excludes a primary residence that sells for under $1.5 million, retirement accounts, certain farm assets and conservation land. Investment real estate is not on the list, so a seller of a $2 million apartment building will almost always owe it.
Then comes the local layer. Every county and Baltimore City levies its own income tax on the same income. For 2026 counties may charge up to 3.30%; Montgomery, Prince George's, Howard, Baltimore County and Baltimore City sit at 3.20%, and Worcester County (Ocean City) is lowest at 2.25%. Maryland does not split out depreciation recapture: the part of the gain that federal law taxes at 25% is simply more Maryland income at the same rates. Check your number with the depreciation recapture calculator.
Maryland tax on a $300,000 gain: worked example
Assumptions: a long-term gain of $300,000 on an investment property, $100,000 of it unrecaptured §1250 depreciation, a married couple filing jointly who are already in the top federal bracket and the top Maryland bracket, living in Montgomery County. Their federal AGI is well above $350,000, so the 2% capital gains tax applies to the full gain.
| Tax line | Amount |
|---|---|
| Unrecaptured §1250 gain: 25% × $100,000 | $25,000 |
| Remaining long-term gain: 20% × $200,000 | $40,000 |
| Net investment income tax: 3.8% × $300,000 | $11,400 |
| Federal subtotal | $76,400 |
| Maryland state tax: 6.5% × $300,000 | $19,500 |
| Maryland 2% capital gains tax: 2% × $300,000 | $6,000 |
| County income tax, Montgomery County example: 3.20% × $300,000 (depends on residence) | $9,600 |
| Total tax deferred by a full 1031 exchange | $111,500 |
A resident of Worcester County would swap the $9,600 county line for $6,750 (2.25%). A nonresident owner skips the county tax but pays the 2.25% special nonresident tax, so the number barely moves. Compare selling outright against exchanging with our capital gains vs. 1031 exchange comparison.
The 2% Maryland capital gains tax and your exchange
Three points matter for exchangers:
- Deferred gain is not net capital gain. A fully deferred exchange recognizes no gain, so there is nothing for the 2% tax to apply to in the year of sale.
- Boot is. Cash kept out of the exchange, or a smaller mortgage on the replacement property, is taxable gain. If it lifts federal AGI over $350,000, the 2% applies. Run partial scenarios through the partial 1031 boot calculator.
- Big nonresident sales lose the quick refund. From 2026, nonresidents selling for $1,500,000 or more can no longer file Form MW506R for a tentative refund of excess withholding. They must wait and file a full return with Form 502CG. That makes the MW506AE exemption far more valuable.
Maryland nonresident withholding (MW506NRS) and the 1031 exemption
When a nonresident individual or entity sells Maryland real property, the settlement agent must withhold tax before the deed is recorded and send it with Form MW506NRS. For sales after June 30, 2025 the rate is 8.75% of the total payment for individuals and 8.25% for entities.
A like-kind exchange is one of the listed grounds for a full or partial exemption. To use it, file Form MW506AE with the Comptroller along with a letter from your qualified intermediary describing the exchange and any taxable boot. The Comptroller must receive the complete application at least 21 days before closing, so start the paperwork as soon as the property is under contract. With the certificate in hand, the settlement agent withholds nothing, or only on the boot, and the full proceeds go to the intermediary.
Miss the window and the withholding still comes out. That cash never reaches the exchange account, so you would need other funds to buy replacement property of equal value, and you would recover the overpayment only through a return. Foreign sellers also face FIRPTA; see FIRPTA for foreign sellers.
Maryland transfer and recordation taxes
A 1031 exchange defers income tax only. Maryland's deed taxes are due at every closing, on the sale and again if you buy replacement property in the state:
- State transfer tax: 0.5% of the consideration. When the buyer is a first-time Maryland homebuyer the rate drops to 0.25% and the seller pays all of it.
- County transfer tax: set locally. Baltimore City and Baltimore County each charge 1.5%.
- County recordation tax: also local, stated per $500. Baltimore City charges $5.00 per $500 (1%); Baltimore County charges $2.50 per $500.
Who pays is negotiated in the contract, and in many counties the costs are split. On a $1 million Baltimore City sale, state and city transfer tax alone come to $20,000 before recordation. Budget for the same taxes again on the purchase side.
Maryland conformity and clawback rules
Maryland computes income starting from federal adjusted gross income, so a gain the IRS lets you defer under Section 1031 does not show up on your Maryland return. Maryland does not require an annual information return for exchanges into other states and has no clawback like California's FTB 3840 or Oregon's OR-24. Once you exchange into property outside Maryland and stop being a resident, a later sale of that replacement property is not Maryland-source income.
Moving into or out of Maryland
Nonresidents owe Maryland tax on gain from Maryland real estate: the state rate plus the 2.25% special nonresident tax that stands in for the county tax. This is why the withholding exists. Owners living in Virginia or the District usually get a home-state credit for Maryland tax paid.
Exchanging out of Maryland is common. Investors trade Montgomery County rentals for property in Delaware, where income tax is lower, or for Sun Belt properties. Moving in, remember that Maryland will tax the entire gain when you later sell, even the part that built up while you lived elsewhere, unless your former state claims it. See our Virginia and Washington DC pages for the other side of the Capital Beltway.
Where Maryland 1031 exchanges happen
Most Maryland exchange volume comes from four areas. Montgomery and Prince George's counties supply condos, townhouse rentals and small multifamily bought by federal workers and contractors. Baltimore City and Baltimore County have rowhouse portfolios, where owners often consolidate ten small units into one larger building. Worcester County's Ocean City condos generate seasonal-rental exchanges, with the lowest county rate in the state as a side benefit.
We do not yet have a city guide for Maryland; our property qualification check covers any Maryland asset type.
Federal 1031 rules that apply in Maryland
The clock starts at your Maryland settlement. You have 45 days to name replacement property in writing and 180 days to close on it, with no extensions for weekends. A qualified intermediary must hold the money the whole time. To defer everything, buy at least as much as you sold and replace the debt you paid off. Our 1031 exchange guides go deeper, the 45-day identification validator checks your list, and the 1031 exchange calculator estimates the tax you keep invested.
Maryland 1031 exchange mistakes to avoid
- Filing MW506AE late. The Comptroller needs it 21 days before closing. Waiting until the week of settlement means 8.75% leaves the deal.
- Pricing the state rate only. Sellers quote 5.75% and forget the 6.25% and 6.5% brackets, the 2% surtax and the county tax.
- Taking boot without checking the $350,000 AGI line. A little cash out can trigger the 2% tax on the whole recognized gain.
- Counting on a tentative refund. Nonresident sales of $1.5 million or more no longer qualify for MW506R.
- Forgetting deed taxes on both sides. Transfer and recordation taxes can run 2% to 3% in Baltimore and are not deferred.
Start your Maryland exchange with 1031 Specialists
Call us as soon as you list. We will draft the QI letter for your MW506AE, coordinate with your Maryland title company and set up the exchange account before settlement. Open your exchange online, book a free intro call or phone (631) 438-1031.
Frequently asked questions
How can I avoid capital gains tax on real estate in Maryland?
Reinvest the full proceeds in like-kind investment property through a 1031 exchange with a qualified intermediary. That defers federal tax, the Maryland state tax, the 2% capital gains tax and county tax. Holding until death gives heirs a stepped-up basis, and a primary residence under $1.5 million is excluded from the 2% tax.
How much is Maryland capital gains tax on a rental property sale?
Maryland taxes the gain as ordinary income at up to 6.5%, adds a 2% tax on net capital gains when federal AGI exceeds $350,000, and adds county tax of 2.25% to 3.30%. A top-bracket Montgomery County couple pays about 11.7% of the gain to Maryland.
Does a 1031 exchange avoid Maryland nonresident withholding?
Yes, if you plan ahead. A like-kind exchange qualifies for exemption on Form MW506AE, filed with a letter from your qualified intermediary. The Comptroller must receive it at least 21 days before closing; otherwise 8.75% (individuals) or 8.25% (entities) is withheld.
Does the 2% Maryland capital gains tax apply to investment property?
Yes. The exclusions cover a primary residence selling for under $1.5 million, retirement accounts, certain farm property and conservation land, but not rentals or commercial buildings. It applies only to recognized gain, so a fully deferred exchange avoids it.
Who pays transfer tax in Maryland, and does a 1031 exchange defer it?
The contract decides, and many counties split it. The state charges 0.5% and counties add transfer and recordation taxes, such as 1.5% plus $5.00 per $500 in Baltimore City. A 1031 exchange does not defer or reduce these taxes.
Can I exchange Maryland property for property in another state?
Yes. Any US investment real estate is like-kind, and Maryland has no clawback or annual reporting on out-of-state replacement property.
Sources
- Comptroller of Maryland: Tax Alert on nonresident real property withholding (April 2026)
- Comptroller of Maryland: Form MW506AE (2026)
- Comptroller of Maryland: Technical Bulletin 58, additional tax on net capital gains
- Comptroller of Maryland: Tax Alert on 2025 rate changes
- Comptroller of Maryland: 2026 state and local withholding rates
- Maryland General Assembly: Tax-Property §13-203 (state transfer tax)
- Baltimore City Bureau of the Budget: city tax rates
- Baltimore County: deed transfer and recordation
Related: 1031 exchange in Virginia, Washington DC, Delaware, Pennsylvania and all 50 states.
This page explains Maryland rules in general terms and is not tax or legal advice. Rates and forms change; confirm your situation with a Maryland CPA or attorney before you sell.
