1031 Exchange & DST Investing in Maryland
Maryland conforms to federal Section 1031, but 2025 changes raised its top marginal rate to 6.5% and added a 2% capital-gains surcharge on higher earners, plus local income taxes, making deferral especially valuable. The state also withholds 8.75% on nonresident individual real estate sales.
State tax treatment of a 1031 exchange
Maryland conforms to federal Section 1031, so a qualifying like-kind exchange defers Maryland income tax on the gain. Effective for 2025, Maryland added new brackets with a top marginal rate of 6.5% on income over $1 million, plus a 2% surcharge on net capital gains for individuals with federal adjusted gross income above $350,000. Local income taxes of up to 3.3% apply on top of the state rate.
For sales occurring after June 30, 2025, Maryland withholds 8.75% for nonresident individuals (8.25% for entities) on the taxable gain from real property sales, collected at closing unless reduced or exempted. Maryland does not impose a separate clawback on previously deferred gain.
Market snapshot
The Baltimore-Washington corridor drives Maryland's investment market. Baltimore combines port and logistics activity with a life-sciences cluster around Johns Hopkins, while Montgomery and Prince George's counties tie into the federal economy and the I-270 biotech corridor. Data centers have become a fast-growing asset class in the region.
Multifamily across the DC suburbs and Baltimore remains the deepest source of 1031 activity, supported by strong rental demand, and industrial and logistics product near the port and interstates continues to attract replacement capital.
Why 1031 & DST investors look here
- The 2025 rate increases, the 2% capital-gains surcharge, and local taxes push combined marginal rates toward 12% for high earners, making deferral compelling
- Baltimore and DC-suburb owners often want to exit management-intensive multifamily while preserving income
- DST and 721 structures allow diversification and estate-planning flexibility without recognizing a large concentrated gain
Replacement-property options
A Maryland exchange does not require in-state replacement property. Accredited investors can identify DST interests, 721 UPREIT contributions, or Opportunity Zone investments anywhere in the country, converting a single Maryland building into diversified, professionally managed passive real estate. These vehicles are illiquid, carry market and sponsor risk, and are limited to accredited investors.
Frequently asked questions
Does Maryland tax a 1031 exchange?
No. Maryland conforms to federal Section 1031, so a qualifying exchange defers Maryland income tax on the gain, including any amount that would otherwise be subject to the new capital-gains surcharge.
Can I exchange Maryland property for out-of-state DSTs?
Yes. The replacement property does not need to be in Maryland, so a Maryland property can be exchanged into DST interests holding real estate in other states, subject to accredited-investor eligibility.
How much does Maryland withhold when a nonresident sells real estate?
For sales after June 30, 2025, Maryland withholds 8.75% for nonresident individuals (8.25% for entities) on the taxable gain. A qualifying exchange may support a reduced-withholding certificate if requested before closing.
Gerald F. “Jerry” Baker, III — Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Read full bio →
State tax treatment is general and changes frequently; this page is educational and is not tax, legal, or investment advice. Confirm current state and local rules with your own CPA and attorney. Securities offered through Aurora Securities, member FINRA/SIPC. Real estate investments involve risk, including possible loss of principal.