Maryland recognizes the federal 1031 exchange law and will grant an exemption if you meet certain criteria. If you need help with a 1031 exchange and are a Maryland nonresident we can help with the frustrating Maryland Certificate of Full or Partial Exemption submission process.
The MD nonresident withholding law requires that a new deed may not be recorded unless the tax is paid to the Clerk of the County Circuit Court. For nonresident entities the rate is 8.25%. No tax needs to be withheld if the nonresident seller or exchanger presents, at settlement, a Certificate of Full or Partial Exemption (Form MW506AE for 2019) issued by the Comptrollers Office. The Certificate will provide full exemption from withholding or provide the partial amount of tax to be withheld at settlement. To obtain an exemption certificate, nonresident exchangers must submit to the Comptroller of Maryland, twenty-one days in advance of settlement, Maryland Form MW506AE (Form MW506AE for 2019), Application for Certificate of Full or Partial Exemption. For 1031 exchangers the Comptrollers office also requires a cover letter from the qualified intermediary who has been hired to facilitate a 1031 exchange. The Comptroller’s Office will then issue the taxpayer their certificate. If a nonresident taxpayer has income from a Maryland property (even if there is a net loss), they need to file a Maryland Form 505, Maryland Nonresidential Income Tax Return, annually. If the Form 505 has not been filed for previous years, the Comptroller’s office may reject the application for exemption as there is no Maryland record that the property was held for business or rental purposes to qualify for the IRC Section 1031 exemption. The settlement agent is then required to collect the percentage from the net proceeds due to the exchanger/seller and submit that amount to the Clerk of the Court. Most likely this amount will not be refunded before the exchanger settles on a replacement property, and may become taxable federal income.
No tax will be collected if the seller certifies the property was their principal residence in accordance with the federal rules in IRC Section 121. If an individual or a corporation has paid withholding tax at settlement in excess of the amount owed, they may file an Application for Tentative Refund of Withholding on Sales of Real Property by Nonresidents (Maryland Form MW506NRS). The request for refund may be filed with the Comptroller after 60 days have elapsed from the date the tax was paid to the Clerk of the Court or Department of Assessments and Taxation by the settlement agent. For additional information, contact taxhelp@comp.state.md.us or call 1-800-638-2937.
Here are links to the specific MD non-resident withholding requirements.
MD Tax website on Nonresident ( non-voter) real property withholding