Investors who sell Maryland real estate that has been held for rental, investment or business use should be aware of the Maryland Nonresident Withholding Tax when they sell their investment real property. The Maryland Nonresident Withholding Tax can complicate the administration of a tax-deferred exchange transaction under Section 1031 of the Internal Revenue Code ("1031 Exchange").
Maryland Does Recognize 1031 Exchanges
The state of Maryland does in fact recognize 1031 Exchanges and does allow the seller of Maryland real estate held for rental, investment or business use to defer the payment of state income taxes under certain circumstances and provided they meet certain requirements.
Application for Certificate of Full or Partial Exemption
The seller must submit an Application for Certificate of Full or Partial Exemption (
MD Form MW506AE) of the nonresident withholding tax at least twenty-one (21) days before the closing of the sale of their relinquished property. Payment of the nonresident withholding tax will NOT be required as long as the the nonresident seller provides the Certificate of Full or Partial Exemption issued by the Comptroller's Office to the settlement agent at closing.
Full or Partial Exemption
The Certificate of Full or Partial Exemption will provide either a full exemption from withholding or will provide a partial amount of nonresident withholding tax that is to be withheld at the closing of the sale of the relinquished property.
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