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A little clarity for your next decision.
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Investor WorkspaceA little clarity for your next decision.
By Jerry Baker
A Maryland 1031 exchange can defer gain when you exchange qualifying investment or business real estate for other qualifying real estate. The plan also needs to cover Maryland taxes, cash withheld at closing, and rules that affect the next property’s income. This guide explains those checks and the choice of a Delaware statutory trust, or DST.
I would begin with three separate files: your tax records, the property you plan to sell, and the investment you might buy. Each answers a different question. A tax estimate shows the cost of a taxable sale. The sale file shows how much money may reach your exchange account. The replacement file shows what that money could buy and what risks come with it.
Federal Section 1031 applies to real property held for investment or use in a trade or business. A personal residence does not qualify just because the owner plans to buy a rental afterward. An exchange generally defers gain; it does not make the gain disappear. Your property's use matters more than the name on the sales brochure. [1]
In a deferred exchange, you generally must identify the next property in writing within 45 days after the sale. You must buy it within 180 days or your federal return’s due date, including extensions, if earlier. The identification rules limit what you can list. Arrange the qualified intermediary before closing and have counsel review any right to receive the proceeds. [2]
Those steps belong on a shared calendar with the closing agent. Maryland's withholding process has a separate advance deadline. A permit, lender delay, or missing tax document will not move the federal dates just because everyone is working hard.
Maryland's 2025 changes added state income-tax brackets of 6.25% and 6.50% at higher taxable-income levels. The threshold depends on filing status. Local income taxes also matter, and county rates can change by year. A spreadsheet that stops at the old 5.75% top state rate may be out of date. Ask your CPA to use the rules for the year of your sale. [3]
A separate change adds a 2% tax on covered net capital gain. It applies when an individual’s federal adjusted gross income exceeds $350,000. This is not 2% of the property's sale price. The rule has defined exceptions; it does not exempt every business-property sale. Technical Bulletin 58 also explains Maryland’s exchange treatment. Gain left out of federal adjusted gross income in a qualifying 1031 exchange is left out of Maryland adjusted gross income. [4]
I would ask for two written estimates using the same sale assumptions: a taxable sale and the proposed exchange. Have the CPA identify which income is deferred, which might remain taxable, and which costs reduce gain. Keep the sale price, loan payoff, adjusted basis, and cash proceeds on separate lines. They are not four names for the same number.
Next, compare the tax savings with the investment decision. Deferring tax has value, but it does not fix a poor lease, an unfunded roof, or an exit plan that depends on a high resale price. I want the replacement to make sense even when we give its business plan a harder test.
Maryland’s April 2026 alert covers sales by nonresidents. It gives withholding rates of 8.75% for individuals and 8.25% for entities. These apply to the defined payment amount under the withholding rules, not a universal tax on gross price. Withholding is a payment toward tax, not the final income-tax calculation. For a sale at $1.5 million or more, the early tentative-refund process is not an option. The seller must seek any refund through the annual return. [5]
For an exchange, review Form MW506AE well before settlement. The completed application and required documents must reach the Comptroller at least 21 days before closing. For an exchange, it requires a signed intermediary letter. That letter must describe the parties, property, exchange role, and any taxable boot. Applying does not itself produce a full exemption. The certificate and closing instructions must reflect the actual transaction. [6]
This is a cash-planning issue as well as a tax issue. Ask the settlement agent to show what happens if the certificate is ready, is partial, or has not arrived. Do not build the replacement budget around a refund that may come months later. Give the intermediary the same version of the closing statement your CPA is reviewing.
I would make one person responsible for tracking that application. A folder with the contract, basis records, depreciation schedule, intermediary letter, submission receipt, and agency response is more useful than an email that says, “I thought the title company had it.”
Maryland's Homestead Tax Credit is tied to a qualifying principal residence and its occupancy rules. It is not a credit you should assume applies to a rental or follows a seller to an investor buyer. In general, you must live there as your main home for six months, including July 1. Stated exceptions apply. [7]
Request the assessment record, full tax bill, credit details, and any pending appeal. Then ask the assessor or your tax professional which items apply after your purchase and planned use. Show the buyer’s estimated expense beside the seller’s actual bill. Make the difference easy to see.
For a small rental building, that difference can affect how much cash you can safely distribute. For a larger purchase, I would also check whether the budget assumes a successful appeal. An appeal may be worth pursuing. Savings should remain a separate case until there is support for putting them in the base budget.
Maryland's lead program requires covered pre-1978 rental properties to register and renew annually. Owners generally need the required risk-reduction inspection certificate at tenant turnover unless an applicable exemption, such as qualifying lead-free status, applies. A new owner needs a new registration and tracking number. The seller's registration is not a substitute for the buyer's steps. [8]
Request certificates that match the actual unit addresses. Compare those records with the rent roll and tenant move-in dates. I would flag any unit for which the seller offers a painting invoice instead of the needed inspection record. The next task is to have the relevant professional determine what is required, when it can be done, and who pays.
Baltimore City requires a rental license before covered property is offered for rent, rented, or used to collect rent. Check the actual license and inspection status, not just a rental listing or a seller's statement that tenants have lived there for years. [9]
The city's code prohibits transferring a rental license to a new owner. It requires the new owner to apply within 60 days after assuming record ownership or operation. That application period should not be read as blanket permission to ignore the separate licensing requirement. Have local counsel and the licensing office confirm the transition plan. [10]
My review file would link each unit to its lease, deposit balance, lead records, open violations, and license record. That makes missing items easier to price. It also helps avoid the false comfort of one neatly printed certificate covering a building with several unresolved units.
Montgomery County set a 5.2% standard rent-increase allowance for regulated units. It took effect July 1, 2026. Its separate 3.3% voluntary guideline is not the same rule, though it is mandatory for certain regulated programs. Coverage, exemptions, other agreements, and approved adjustments matter. The county also describes a 90-day written notice requirement for increases in licensed rentals. Do not apply one headline percentage to every unit or use the prior year's allowance. [11]
When reviewing a rent-growth plan, ask for the legal rent, last increase, next permitted date, and supporting notices. Separate an allowed increase from an increase a tenant is likely to accept. A lease can meet the legal test and still lose a tenant who has a less expensive choice nearby.
Maryland generally caps a residential security deposit at one month's rent. A narrow exception allows up to two months. All of the law’s utility-assistance conditions must be met. Deposits generally must be returned within 45 days after the tenancy ends, less lawful deductions, with required interest. Special procedures and exceptions apply. A new owner also takes on return duties. Missing seller funds do not simply erase them. [12]
At closing, reconcile the tenant ledger to the money actually transferred. List each tenant's deposit, interest calculation, and any disputed amount. Have counsel review the lease forms. A credit on a settlement statement needs to match the obligations you are taking over.
Maryland's Critical Area includes land within 1,000 feet of tidal waters and tidal wetlands, along with the covered waters and submerged lands. Local planning offices hold the adopted maps. Being in the Critical Area does not mean every lot is unbuildable, but proposed work must meet the rules that apply to that site. [13]
The Critical Area Buffer has a different boundary. It is generally at least 100 feet next to covered waters, wetlands, and streams and may expand for sensitive conditions. New structures, lot coverage, or land disturbance are generally restricted within it. Measurement and local exceptions require site review; a line drawn on a marketing photo is not a permit decision. [14]
Maryland's flood guidance explains that participating communities require permits for development within the mapped 100-year floodplain. This is the area with a 1% annual flood chance, not a promise of one flood per century. Local floodplain review may require elevation and other supporting information. It is separate from Critical Area review. [15]
For a waterfront rental, I would request a survey, permit history, insurance quotes, and the plan for access during a storm. Then I would list every improvement the income plan needs: an added bedroom, new parking, expanded deck, or repaired shoreline. Ask whether each is allowed and what approvals it needs.
A buyer might be comfortable with a property that cannot expand if the current use supports the price. The problem comes when the price assumes more rooms or more bookings and the right to create them has not been checked. I prefer to resolve that gap before it becomes an exchange deadline problem.
Maryland’s agricultural transfer-tax declaration can bind a buyer to farm use. Covered acreage must remain in qualifying use for at least five full consecutive tax years after the deed is recorded. Breaking that pledge can trigger tax, surcharge, and penalty. Read the signed declaration and ask SDAT how your planned use fits before counting on favorable treatment. [16]
Do not treat “land” as one asset class with one set of costs. A working farm, an easement-restricted parcel, and a vacant lot awaiting utilities need different budgets. I would ask who maintains drainage, roads, fences, and any leased buildings. Then I would check which duties remain with the owner when a tenant farms the ground.
If land produces little income, show how you will pay taxes and upkeep for several years. Keep the proposed resale date separate from your own need for cash. A patient business plan is useful only if the investor can afford to be patient.
Consider a hypothetical Maryland rental purchase. These figures are teaching assumptions, not market averages, an available property, or a tax estimate. The owner invests $500,000 of equity, and the property collects $120,000 in annual rent after vacancy and collection losses.
| Annual item | Illustration |
|---|---|
| Collected rent | $120,000 |
| Taxes, insurance, management, repairs, and other operating costs | −$48,000 |
| Net operating income | $72,000 |
| Loan payments | −$30,000 |
| Cash kept for larger repairs | −$12,000 |
| Cash before investor income tax | $30,000 |
That leaves $2,500 a month, or 6% of the $500,000 equity, before income tax. The $72,000 operating income is not the amount available to spend. Loan payments and the repair reserve still need cash.
Now suppose collected rent falls by $10,000 and an unexpected insurance and repair increase adds $8,000. With the other assumptions unchanged, cash falls to $12,000 a year, or $1,000 a month. The cash return drops to 2.4%. There is no claim that those events will occur; the exercise shows how much room the plan has.
I would also ask what was left out. Does the repair allowance cover lead work or a license-related repair identified in diligence? Is the tax line based on the buyer's bill? Does projected rent growth follow the applicable county rules? Correct arithmetic cannot rescue incomplete inputs.
IRS Revenue Ruling 2004-86 describes a specific trust structure. An investor’s interest in that structure can be treated as ownership of real estate for an exchange. The ruling sets important limits on the trustee's powers. “DST” is not a blanket tax qualification for every trust or offering. Have your advisers review the actual structure and exchange fit. [17]
A private placement also needs an investment-risk review. The SEC warns that these investments may be hard to sell. They can provide less disclosure than public offerings and carry a risk of total loss. Eligibility to invest does not mean an offering is suitable for your needs. [18]
My comparison would put direct ownership and the DST on the same page. For each, show cash after property costs, the debt terms, reserves, fees, and the events that could reduce payments. For the DST, add who controls leasing, repairs, refinancing, and sale decisions. For direct ownership, add the time and outside help those decisions require from you.
Do not assume a DST solves the local issues described above. If its real estate is in Maryland, ask how the sponsor has addressed those issues. If it owns property elsewhere, review that location's rules instead. The name of the trust does not move its buildings or change their operating costs.
When those files disagree, keep the issue open rather than averaging the numbers. A seller's projected rent is not a signed lease. A permit application is not an approval. A tax exemption request is not cash already available for the replacement purchase. Clear labels make those differences easier to discuss.
This is general education, not a recommendation to buy Maryland property or a particular DST. Your CPA, attorney, intermediary, and property professionals should apply the rules to your facts. My role in the investment review is to help connect those facts with your goals, including reasons an option may not fit.
No. It applies to covered net capital gain under the rules for taxpayers over the federal adjusted-gross-income threshold. Defined exceptions may apply. A qualifying federal exchange can keep deferred gain out of the Maryland adjusted-gross-income starting point. [4]
Start well before closing. Maryland requires the completed MW506AE application and support to arrive at least 21 days before settlement. Include the required intermediary letter and identify any boot; do not assume a complete exemption will be issued. [6]
No. The city prohibits transfer and requires a new-owner application within 60 days. Confirm the lawful operating plan during the transition instead of treating that filing period as a general exemption from licensing. [10]
The standard allowance for regulated units changed to 5.2% effective July 1, 2026. Check coverage, exemptions, notices, and any special agreement. The separate voluntary guideline is a different measure. [11]
No. The broader Critical Area and the generally smaller shoreline Buffer serve different roles. A Buffer may expand based on site conditions. Ask the local planning office to confirm both boundaries and the rules for your proposed work. [13] [14]
No. A DST interest can have exchange uses when properly structured, but private real estate investments still carry operating, debt, liquidity, and loss risks. Review the offering and your need for accessible cash before choosing it. [17] [18]
Educational information, not an offer or a personal tax, legal, or investment recommendation. Examples are hypothetical and omit stated adjustments. Tax treatment depends on your facts and current law. Review your transaction with your CPA, attorney, and qualified intermediary. Real estate investments can lose value and may be illiquid.
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