State Withholding on Dispositions

State withholding is an exchange problem and not only a reporting problem. It is collected at the closing, out of the proceeds, before the intermediary receives them. Unless an exemption is obtained in advance, it reduces the funds available to buy replacement property, and a refund months later does not repair the exchange arithmetic of Chapter 34.

59.1 Nonresident withholding structures

Maryland. Where Maryland real property, and associated tangible personal property, is sold or transferred by a nonresident individual or a nonresident entity, the deed or other instrument of transfer may not be recorded unless a withholding payment is made with it.¹

The rate changed in 2025. For sales occurring after June 30, 2025, the rate is 8.75 percent of the total payment for nonresident individuals and 8.25 percent for nonresident entities. The individual rate is the lowest county income tax rate plus the highest marginal State income tax rate, and the entity rate is the corporate income tax rate. The individual rate rose because the Budget Reconciliation and Financing Act of 2025 raised the highest marginal State rate.² Older Comptroller guidance still in circulation states a lower individual rate and should not be relied on for current transactions.

What the rate applies to. The total payment is the total sales price paid to the transferor, less the transferor's debts secured by a mortgage or other lien on the property that are paid at the sale, and less other expenses of the transferor arising out of the sale that are disclosed on the settlement statement. It does not include adjustments in the transferor's favor on the settlement statement, and it does include the fair market value of any property transferred to the transferor.³

Who collects it. The person responsible for closing, such as a title company, must ensure that sufficient funds are withheld at settlement and must pay the withholding to the clerk of the circuit court or to the State Department of Assessments and Taxation when the deed is presented for recordation. The payment is reported on Form MW506NRS. The transferor must still file a Maryland return for the year reporting the gain or loss, and claims the withholding there.⁴

California. Withholding is required when California real estate is sold or transferred, and the amount withheld from the seller is remitted to the Franchise Tax Board. Withholding is not required where the sales price is $100,000 or less, where the property is in foreclosure, where the transferor is a bank acting as trustee other than under a deed of trust, or where the seller certifies to an exemption on Form 593.⁵

The obligation sits with the real estate escrow person, a term that includes any attorney, escrow company, title company, qualified intermediary, or anyone else who receives and disburses payment for the sale of real property.⁶

The structural difference. Maryland measures withholding on a net figure, after the mortgage payoff and the seller's closing expenses, and enforces it by blocking recordation. California places the obligation on whoever closes the sale, expressly including the qualified intermediary, which matters for the exchange rules in 59.2.

59.2 Exemption certification procedures

Maryland's general exemptions. The Comptroller lists the exemptions from withholding: a certification under penalties of perjury that the transferor is a Maryland resident; a certification that the property is the transferor's principal residence as determined under the Code and recorded as such with the Department of Assessments and Taxation; a transfer by foreclosure or deed in lieu of foreclosure; a transfer by the United States, the State, or a political subdivision; a deed whose statement of consideration shows zero; and a certificate issued by the Comptroller stating that no tax, or a reduced amount, is due.⁷

A like-kind exchange requires a certificate. It is not self-certifying at the settlement table. The seller applies to the Comptroller on Form MW506AE, Application for Certificate of Full or Partial Exemption, and checks the box for a tax-free exchange for purposes of section 1031.⁸

The documentation. For the exchange exemption, the application must include, in addition to the general documents, a letter signed by the qualified intermediary, or by the person authorized to sign for the entity acting as qualified intermediary, that states the name of each transferor, the property description, that the intermediary will act as qualified intermediary for the transferor as part of a section 1031 exchange of the property, whether there will be any boot, and if so the amount of boot. The amount of any boot must be stated on the application as the taxable amount.⁹

Who files, and what can defeat the application. A separate application is required for each transferor unless the transferors are spouses filing a joint Maryland return, and each application states the transferor's ownership percentage. If the property was ever used as rental or commercial property, Maryland law requires the nonresident owner to have filed nonresident returns reporting that income or loss, and an application from an owner who has not filed them will be denied.¹⁰

Finality. The Comptroller's decision to issue or deny a certificate, and the amount of tax to be withheld on a partial exemption, are final and not subject to appeal.¹¹

California's exchange exemption. California handles the exchange on the withholding form itself. If California real property is part of a simultaneous like-kind exchange under section 1031, the transfer is exempt from withholding, but if the seller receives money or other property exceeding $1,500 from the sale, the escrow person must withhold. If the property is part of a deferred exchange, the sale is exempt at the time of the initial transfer, but if the seller receives money or other property exceeding $1,500, the qualified intermediary must withhold. If the exchange does not take place or does not qualify for nonrecognition, the intermediary or accommodator must withhold 3 1/3 percent of the sales price. The seller signs the perjury statement, and the buyer is not required to sign on an exchange.¹²

Two California provisions protect the intermediary and the timing. Beginning January 1, 2022, a qualified intermediary's withholding obligation is limited to available funds where it did not receive sufficient funds from escrow or has already disbursed funds to complete the exchange; the intermediary reports the amount that should have been withheld, certifies the transaction as cash poor, and attaches supporting documentation.¹³ And where withholding on a failed exchange or on boot occurs in the year after the property was sold, it is credited in the year the withholding occurred, because the seller qualifies for installment reporting, unless the seller elects to report the gain in the year of sale and arranges to move the credit.¹⁴

The contrast. Maryland requires a pre-closing application decided by the Comptroller, with no appeal. California lets the seller certify on the form and moves the withholding obligation to the intermediary later if boot exceeds $1,500 or the exchange fails. A Maryland practitioner used to California practice will be late, and a California practitioner advising on Maryland property will not know the application exists.

59.3 Timing traps

The 21-day rule. The completed Form MW506AE and all required documentation must be received by the Comptroller no later than 21 days before the closing date, and applications with no closing date will not be processed.¹⁵ The rule is stated as receipt, not mailing. It sits inside a contract period that is often only 30 to 45 days long, which means the application is usually due within the first two weeks after the contract is signed.

That deadline has a consequence for the intermediary that is easy to miss. The application needs the intermediary's signed letter, and the letter must state whether there will be boot and how much. The intermediary must therefore be engaged, and the boot must be estimated, three weeks before closing, at a point when the replacement property may not have been identified.

The boot figure is stated in advance. Because boot must be stated as the taxable amount on the application, the certificate reflects the figure the taxpayer projected. Where the final numbers differ, the difference is reconciled on the Maryland return rather than at the table.

No appeal, and no cure at the table. Where the application is denied or arrives late, full withholding applies at closing. The money leaves the proceeds before the intermediary receives them, so the exchange account is short by that amount. Chapter 34 explains what a shortfall in reinvested proceeds does: it becomes boot unless the taxpayer replaces the money with outside cash at the replacement closing.

Tentative refund limits. A nonresident whose proceeds were withheld may apply for a tentative refund no earlier than 60 days after the deed is filed and no later than December 1 of the year of the sale, and a nonresident who sells for more than $1,500,000 is not eligible and must request any refund on the year-end return.¹⁶ The Comptroller's tax alert on the same change states the threshold as $1,500,000 or higher,¹⁷ so a sale at exactly that price should be treated as ineligible. A pass-through entity may not file for a tentative refund at all; amounts paid on its behalf are allocated to its owners and claimed on their returns.¹⁸ Older guidance that cuts off tentative refunds for closings after November 1 has been superseded by the December 1 date in the current bulletin.

The entity trap. A nonresident entity is defined by where it was formed and whether it is qualified or registered with the Department of Assessments and Taxation to do business in Maryland. Current Comptroller publications do not state that test identically: the current application instructions describe an entity that is not formed under Maryland law and not qualified or registered in Maryland, while the Comptroller's 2019 guidance uses or.¹⁹ The difference decides the status of a foreign entity that is registered in Maryland, and the statutory text should be checked before relying on either publication. What is not in doubt is the common case: a Delaware limited liability company that is not registered in Maryland is a nonresident entity under either reading, even if every member lives in Maryland, and its sale is subject to 8.25 percent withholding unless a certificate is obtained.

The federal deadline runs differently. A foreign seller of Maryland property faces both regimes. The federal withholding certificate application of 48.2 must be submitted on or before the closing date. The Maryland application must be received 21 days before it. The Maryland deadline is the earlier one, and it is the one that fails.