1031 exchange in
Maryland.

Does Maryland follow federal 1031 rules?

Maryland conforms to federal Section 1031 for real property. The state-specific operational hurdle is non-resident withholding: 8.0% for non-resident individuals and 8.25% for non-resident entities of total payment to the seller, withheld at closing under the Comptroller's Maryland Non-Resident Real Estate Withholding regime. The §1031 exemption runs through Form MW506AE (Application for Certificate of Full or Partial Exemption), filed at least 21 days before settlement with a QI cover letter. Maryland also has high local recordation and transfer taxes that vary by county and stack on top of the 0.5% state transfer tax.

Maryland capital gains tax structure

Maryland taxes capital gains as ordinary income at a top state rate of approximately 5.75% for 2026, plus a county income tax of 2.25%–3.20% depending on jurisdiction. Effective combined top rate is roughly 8.0–8.95% — Baltimore City and Montgomery County sit at the high end, Worcester County at the low end. No preferential long-term capital gains rate.

Maryland's personal income tax is a graduated state structure topping at 5.75% for 2026, stacked with a mandatory county income tax that ranges from 2.25% (Worcester County) to 3.20% (Baltimore City, Montgomery County, Prince George's County, Howard County, and a few others). Combined effective top rate sits roughly 8.0–8.95% depending on county of residence (or Maryland-source jurisdiction for non-residents). Capital gains have no preferential rate. Maryland conforms to federal §1031 and most other federal provisions, with state-specific add-backs in some years for bonus depreciation. Estimated tax is due quarterly when liability exceeds $500. Maryland imposes a state transfer tax of 0.5% of consideration plus county-level transfer and recordation taxes that vary materially — Baltimore City stacks state + 1.5% city transfer + recordation, Baltimore County 1.5% transfer + recordation, Montgomery County 1.0% transfer + recordation. These hit at every closing including 1031 legs.

Federal tax treatment of a successful 1031 is deferral of capital gain and unrecaptured Section 1250 depreciation recapture (federally taxed at a maximum 25% when eventually recognized). Maryland's state treatment sits on top of those federal rates.

Non-resident withholding in Maryland

Maryland Non-Resident Real Estate Withholding under Md. Tax-Gen. §10-912 requires the buyer (or settlement agent) to withhold 8.0% of total payment for non-resident individual sellers and 8.25% for non-resident entity sellers on sales of Maryland real property. To claim a §1031 exemption, the non-resident seller files Form MW506AE (Application for Certificate of Full or Partial Exemption) with the Maryland Comptroller's Office at least 21 days before settlement, with a cover letter signed by the qualified intermediary identifying the QI, the transferor(s), the property, and any boot. If the Comptroller issues a Certificate of Full or Partial Exemption, the settlement agent is relieved of the corresponding withholding. If the certificate is not in hand at settlement, the 8.0%/8.25% comes out and the seller pursues refund via the non-resident Maryland income tax return. The 21-day lead time is the hardest part — start the MW506AE process the moment you have a binding contract and a confirmed QI.

Common 1031 replacement strategies in Maryland

Maryland 1031 replacement breaks into two distinct geographies. Baltimore-anchored deals are largely value-add multifamily (the city has the deepest distressed Class B/C inventory on the East Coast, with caps 7.5–9% on stabilized older product) and Hopkins-driven life-sciences and medical office (5.5–6.5% caps on Class A medical office adjacent to JHU and JHH). The Baltimore industrial market — Tradepoint Atlantic at the former Sparrows Point steel mill — is the Mid-Atlantic logistics story of the last decade, with credit-tenant big-box distribution at 5.75–6.5% caps. DC-suburban Maryland (Bethesda, Silver Spring, Rockville, Gaithersburg) is federal-contractor office (Lockheed, Booz Allen, NIH-adjacent biotech) and Class A multifamily — Class A multifamily trades 5.0–5.75% caps, comparable to Northern Virginia. Annapolis and the Eastern Shore add waterfront commercial and tourism hospitality at less institutional pricing. Don't 1031 into Maryland office without a hard-headed view on federal contractor footprint stability — the post-DOGE budget environment has hit the corridor.

Top Maryland CRE markets for 1031 buyers

Baltimore

Distressed Class B/C multifamily is the deepest value-add 1031 inventory on the East Coast — stabilized older product trades 7.5–9% caps with meaningful operating risk on collections, deferred maintenance, and lead-paint compliance. Johns Hopkins drives life-sciences and medical office (5.5–6.5% caps on Class A medical office). Tradepoint Atlantic at the former Sparrows Point steel mill is the regional logistics anchor — credit-tenant big-box distribution 5.75–6.5%. Baltimore City layers a 1.5% city transfer tax + recordation on top of the 0.5% state transfer tax — material on every closing. The 3.20% Baltimore City county income tax pushes effective combined top rate to roughly 8.95% on Maryland-source income.

Washington D.C. metro (MD side)

Bethesda, Silver Spring, Rockville, Gaithersburg, and Frederick — federal-contractor office and Class A multifamily dominate. Class A multifamily trades 5.0–5.75% caps, comparable to Northern Virginia. NIH-adjacent biotech and medical office in Rockville and Bethesda 5.5–6.5%. Federal-contractor office (Lockheed, Northrop, Booz Allen, SAIC, leidos) trades 6.5–8% on Class A depending on lease length and tenant concentration — and the post-DOGE budget environment has materially widened cap rates and lengthened leasing timelines on federal-dependent product. Montgomery County's 3.20% local income tax + 5.75% state = ~8.95% combined top rate.

Annapolis

State capital + waterfront — government employment provides demand stability and the U.S. Naval Academy adds institutional anchor. Class B multifamily trades 6.0–7.0% caps; downtown waterfront retail and small-bay commercial 6.5–7.5%. The market is shallow; institutional 1031 capital is rare and most volume is local family-office. Anne Arundel County's 2.81% local income tax + 5.75% state = ~8.56% combined top rate. Waterfront due diligence requires Critical Area review (Chesapeake Bay Critical Area overlay imposes development restrictions within 1,000 feet of tidal waters and tributaries).

Local counsel, recording, and filing in Maryland

Maryland records at the county level (23 counties + Baltimore City as an independent city) through Circuit Court Clerks. Title insurance is competitive. The Maryland-specific counsel issues are (1) MW506AE exemption-certificate timing on non-resident 1031 sales (21-day pre-settlement filing requirement, with QI cover letter required by the Comptroller), (2) the recordation and county transfer tax stack — material on Baltimore City and Baltimore County deals — and (3) ground-rent overhang on Baltimore residential and small commercial property, where ground rents can exist on title and require redemption or assumption. Retain a Maryland-licensed real estate attorney for every closing; the MW506AE process alone justifies it. For DC-suburban Maryland deals, ensure your attorney knows the difference between a Maryland sale and a DC sale (DC has its own DC-1099 and recordation regime).

Common mistakes in Maryland 1031 exchanges

• Starting the MW506AE process less than 21 days before settlement. The Comptroller requires Form MW506AE at least 21 days before settlement, with a QI cover letter attached. File it any later and the certificate isn't in hand at closing — which means the settlement agent is legally required to withhold 8.0%/8.25% of total payment, and you spend the next 6–12 months chasing a refund through the non-resident return. File MW506AE the moment you have a binding contract and a QI engagement letter.
• Ignoring Baltimore ground rents on a Baltimore City multifamily 1031. Baltimore City has a centuries-old ground-rent system where a separate ground-rent owner can hold a recurring annual payment claim against residential and small commercial property. Many Baltimore buyers are unaware of this until a title commitment surfaces an active ground rent — at which point you either redeem (pay off the ground rent), assume it (continue the annual payment), or lose the deal. Out-of-state 1031 buyers stumble on this routinely. Get a Baltimore-licensed title examiner; ground rent is a Baltimore-only animal.
• Underwriting DC-suburban federal-contractor office at 2019 cap rates. The federal-contractor footprint reset post-DOGE has widened cap rates on Class A federal-contractor office in Bethesda, Rockville, and Tysons-adjacent Maryland by 150–250 bps from 2019 levels. Underwriting at pre-correction caps means your bid wins, your acquisition closes, and your 5-year hold underperforms because the leasing assumptions were stale. Talk to a CBRE or JLL Mid-Atlantic capital markets broker about current trade comps before you commit, not after.

What to do if you're starting a Maryland-source 1031

1. Engage a Qualified Intermediary before the downleg closes. Your QI cannot be a disqualified person (attorney, CPA, or real estate agent who has represented you in the last two years).
2. Confirm state conformance and any clawback or withholding filings with a Maryland-licensed CPA.
3. Identify replacement property within 45 days in writing, delivered to your QI, under the Three-Property Rule or one of the alternative identification rules.
4. Close on replacement within 180 days of the downleg closing or by your federal tax-return due date (with extensions), whichever is earlier.
5. File Form 8824 with your federal return reporting the exchange. File any required Maryland state forms for the year, including any clawback or withholding-exemption filings.

FAQ: 1031 exchanges in Maryland

How does the MW506AE process work for a 1031 exchange?

Form MW506AE is the Application for Certificate of Full or Partial Exemption from Maryland Non-Resident Real Estate Withholding. For a §1031 exchange, the non-resident seller files MW506AE with the Maryland Comptroller's Office at least 21 days before settlement, with a cover letter signed by the qualified intermediary identifying the QI, the transferor, the property, and whether there will be any boot (and the amount). The Comptroller reviews and issues a Certificate of Full Exemption (no boot) or Partial Exemption (boot recognized). The settlement agent is relieved of withholding to the extent of the certificate. No certificate at closing = 8.0% (individuals) or 8.25% (entities) withheld and refund chase through the income tax return.

What happens to the 8% withholding if I miss the MW506AE deadline?

The settlement agent withholds 8.0% (individuals) or 8.25% (entities) of total payment at closing and remits to the Maryland Comptroller. The withheld amount is credited against your eventual Maryland income tax liability when you file the non-resident return. For a §1031 exchange where no Maryland gain is recognized, the entire withheld amount is refundable — but the refund process can take 6–12+ months. The cash drag and the time value loss are the cost of missing the 21-day MW506AE window. File early.

How much do Baltimore City transfer and recordation taxes add to a 1031 closing?

Baltimore City stacks a 1.5% city transfer tax + state recordation tax (currently $5.00 per $500 of consideration) on top of the 0.5% state transfer tax. Combined transfer + recordation in Baltimore City runs roughly 3.0–3.5% of consideration, payable at every deed transfer including each leg of a 1031. There is no §1031 exemption from Maryland transfer or recordation taxes. On a $5M Baltimore City multifamily upleg, that's $150K–$175K in transaction tax that has nothing to do with income tax. Plan for it in your closing-cost model.

Are Maryland ground rents a deal-killer for a Baltimore 1031?

Not necessarily, but they have to be addressed in writing before closing. Maryland ground rents are recurring annual payment claims (often $50–$200/year, but capitalized values can be $1,000–$5,000+ per ground rent) held by separate ground-rent owners on Baltimore residential and small commercial property. The buyer's options are (a) redeem (pay off the ground rent under Md. Real Property §8-110 redemption procedures), (b) assume the annual payment, or (c) negotiate seller redemption pre-closing. Out-of-state 1031 buyers should default to seller redemption — your operating model doesn't have a line for ground-rent payments and your lender may not accept the encumbrance.

Does the Maryland 4% surcharge on income above $1M apply to my 1031 boot?

Maryland does not impose a millionaire's-tax-style 4% surcharge in the Massachusetts model — but the combined state + county top rate already sits at 8.0–8.95% depending on jurisdiction. If you take significant boot on a 1031, the boot is taxed at your marginal Maryland combined rate (state + county of residence for residents, or the applicable Maryland-source jurisdiction rate for non-residents). For non-residents, the county portion is generally a 'Special Non-Resident Tax' set at the lowest county rate plus an additional non-resident tax — confirm the exact 2026 figure with a Maryland CPA.

Should I 1031 into DC-suburban Maryland federal-contractor office in 2026?

Be careful. The post-DOGE federal contracting footprint reset has widened cap rates and lengthened leasing timelines on federal-dependent office product across the DC-suburban Maryland corridor. Class A federal-contractor office that traded 6.5–7.0% in 2022 is now 8%+ on the trades that are happening, and many properties aren't trading at all. If you 1031 into this product, underwrite (a) a longer downtime assumption between leases, (b) tenant concessions that have widened materially, and (c) the genuine possibility that the contractor tenant downsizes or doesn't renew. The yield looks attractive on paper because the risk is real.