Maryland: A Jurisdictional Case Study

It adds the points that are specific to Maryland practice, including one area of Maryland property law, the ground rent, that has no counterpart in most States.

61.1 Nonresident withholding and advance exemption

A Maryland practice sees nonresident sellers constantly: residents of the District of Columbia, Virginia, Pennsylvania, and Delaware who own Maryland rental or investment property. Every one of them is subject to withholding at the relinquished property closing unless a certificate is obtained in advance.

For sales after June 30, 2025, the rate is 8.75 percent of the total payment for nonresident individuals and 8.25 percent for nonresident entities.¹ For an exchange, the seller applies on Form MW506AE, checks the box for a tax-free exchange under section 1031, and attaches the qualified intermediary's signed letter stating whether there will be boot and how much. The application must be received 21 days before closing, and the Comptroller's decision is final.²

The Maryland-specific timing point. The federal identification period does not begin until the relinquished property closes. The Maryland application must be received three weeks before that. A nonresident client must therefore commit to an exchange, engage an intermediary, and estimate boot before the federal clock has started, at a stage when the replacement property often has not been found. That sequence should be explained at the first meeting, not when the contract is signed.

The capital gains surcharge reaches nonresidents. Where a nonresident expects gain on a Maryland sale to be subject to the additional two percent tax on net capital gain, the Comptroller advises an additional estimated payment to avoid underpayment.³ Boot on an exchange by a nonresident whose federal adjusted gross income exceeds $350,000 is the ordinary case, and 57.2 describes the computation.

61.2 State transfer tax and county recordation tax

The State transfer tax is 0.5 percent of the consideration payable for each instrument of writing.⁴ County recordation and transfer taxes vary widely, and the variation is large enough to affect where a client looks for replacement property.

The Department of Legislative Services reports the following rates for fiscal year 2026 in a sample of counties.⁵

In Anne Arundel County the county transfer tax is 1.0 percent on transactions up to $999,999.99 and 1.5 percent on transactions of $1,000,000 or more.⁶ Most investment property exchanges in the county cross that threshold on at least one side.

How the exchange legs are taxed. The sale deed and the purchase deed are taxable on the consideration. Where an intermediary takes title, the legs into and out of the intermediary are treated as zero consideration transfers under the Assistant Attorney General's advice as reported, and in most forward exchanges direct deeding means those legs are never recorded at all. 60.2 sets out the analysis and its limits.

Anne Arundel County is a charter county. A State transfer tax exemption does not automatically apply to its county transfer tax, as 60.3 explains, so any exemption claimed on a county transfer should be checked against county law.

61.3 Reverse exchange transfers and the final step

In a Maryland reverse exchange, the exchange accommodation titleholder ordinarily takes title to the replacement property through a single member limited liability company. The titleholder's acquisition from the seller is a taxable conveyance on the consideration paid.

The final step, when the titleholder transfers the replacement property to the taxpayer, has been treated as exempt from State and local recordation and transfer taxes, whether made by deed or by assigning the company's membership interests, on the theory that the titleholder is a straw man conveying to the beneficial owner.⁷ For the assignment route, the controlling interest provision applies the deed exemptions to a transfer of entity interests: a transfer of a controlling interest is not subject to recordation tax if a deed between the same parties under the same circumstances would have been exempt.⁸

Three cautions specific to Maryland.

Confirm before the final step. The exemption rests on advice to clerks that is described in a practice guide and a firm's analysis rather than on an enumerated statutory exemption. The treatment should be confirmed with the clerk, and with the Department of Assessments and Taxation where the assignment route is used, before the transaction closes.

Do not buy the exemption with the wrong words. The conveyance tax theory calls the titleholder a straw man. Federal law requires the titleholder to hold qualified indicia of ownership in its own right. The exchange documents should describe the titleholder as federal law requires, and the conveyance tax treatment should be sought through the clerk's accepted practice, as 60.2 explains.

Land the client already owns cannot be parked. The reverse exchange safe harbor does not apply to replacement property the taxpayer owned within the 180 days before the titleholder acquired it,⁹ so a Maryland client who owns a lot and wants to build on it cannot use this structure for the lot, as 31.4 develops.

61.4 Ground rent as a real property interest

What a ground lease is. A Maryland ground lease generally has a ninety-nine year term and is renewable perpetually. It creates a leasehold estate in the tenant that is personal, not real, property under Maryland law, and the ground lease holder retains a reversion and fee simple title to the land. The tenant typically pays all taxes and costs of ownership, and the holder receives rent in annual or semiannual installments. The system is concentrated geographically: as of February 2015 there were 88,422 ground leases registered with the Department of Assessments and Taxation, of which 59,955 were in Baltimore City, 24,506 in Baltimore County, and 3,539 in Anne Arundel County, with small numbers elsewhere.¹⁰

The 2007 legislation. In response to reports that homeowners were losing their houses over missed ground rent payments, the General Assembly enacted a package in 2007. Among its measures, it prohibited the creation of new residential ground rents on or after January 22, 2007; repealed the holder's action of ejectment for nonpayment and substituted a lien; required holders to register ground leases with the Department by September 30, 2010, on pain of extinguishment; required holders to mail bills at least 60 days before each installment and required contracts of sale to disclose the ground rent; converted irredeemable ground rents created before April 9, 1884 into redeemable ones unless the holder recorded a notice of intention to preserve irredeemability; and eliminated the waiting period before a tenant could redeem.¹¹

Two decisions cut the package back. In 2011 the Court of Appeals held that the provisions extinguishing unregistered ground rents and transferring the holder's interest to the tenant were unconstitutional under the Maryland Declaration of Rights and Constitution, because they retrospectively abrogated vested rights and took property without just compensation. The registration requirement itself was upheld.¹² The General Assembly responded in 2012 by making registration a condition of collecting rent, suing to enforce the lease, or obtaining a lien, by allowing a registered holder to collect up to three years of back rent, and by voiding the extinguishment certificates that had been issued.¹³

In 2014 the court held that the retroactive elimination of ejectment, and its replacement with a lien and foreclosure process, was also unconstitutional. The court reasoned that the holder's reversionary interest includes both the reversion and a vested right of re-entry, and that ejectment is essential to that right.¹⁴

Redemption today. The Department does not collect ground rent or manage ground leases. It maintains the registry and administers a redemption process: the tenant applies with a fee, and no sooner than 100 days after approval submits an affidavit and a lump-sum payment by certified check, after which the Department issues a certificate of redemption that the tenant records in the county land records.¹⁵

The section 1031 analysis. Chapter 16.5 states it, and the Maryland history above sharpens it.

The tenant's leasehold is real property for section 1031 purposes. The regulation lists a leasehold among the intangible assets that are real property, and the State law paragraph applies only except as that list otherwise provides.¹⁶ Maryland's personal property label does not change the federal result. Whether the leasehold is of like kind to a fee then turns on the unexpired term, as 16.2 explains.

The holder's interest is fee ownership subject to the lease, and the court's decisions support that reading. The Court of Appeals has twice described the holder's position as a bundle of vested property rights, including the reversion and the right of re-entry. That is an interest in land, not merely a right to payment, which is the distinction the exclusion list of paragraph (a)(5) turns on. A holder's registration status affects what the holder can enforce, but under the 2011 decision it does not extinguish the interest.

Redemption is a disposition by the holder and an acquisition by the tenant. For the holder it is a sale for cash, and it can be part of an exchange only if the proceeds are received by a qualified intermediary rather than by the holder. Whether redemption money paid through the Department's administered process can be directed to an intermediary is a practical question that should be resolved with the Department before a holder plans an exchange around it. For the tenant, redemption merges the reversion into the tenant's title, which is a purchase and not an exchange.

61.5 Practice notes for Maryland counsel

The following list is in the order a transaction meets each item.

At engagement. Confirm each seller's State of residence, and for an entity, where it was formed and whether it is registered with the Department of Assessments and Taxation; 59.3 explains why both facts matter. Identify the county of each property and its recordation and transfer tax rates. Check the ground rent registry for any residential property in Baltimore City, Baltimore County, or Anne Arundel County.

At contract. Include the cooperation clause of 52.3 and allocate the transfer and recordation taxes expressly. For property subject to a ground rent, the contract must include the ground rent disclosures Maryland requires.¹⁷

Three weeks or more before the relinquished closing. Have the Form MW506AE received, with the intermediary's letter and a boot estimate, for any nonresident seller. Confirm that any required Maryland nonresident rental returns have been filed, or the application will be denied.

At the relinquished closing. Categorize the settlement statement line items, deliver the written assignment notice to all parties on or before the transfer, and confirm that the proceeds go to the intermediary.

Before the client decides to take cash. Model boot at the stacked rate: federal capital gain and unrecaptured section 1250 rates, the net investment income tax, Maryland's ordinary rate, the two percent surcharge where federal adjusted gross income including the boot exceeds $350,000, and county income tax. Check the easement exception for farmland.

At the replacement closing. Budget the conveyance taxes again, confirm zero consideration treatment for any intermediary leg with the clerk, and in a reverse exchange confirm the final step treatment before it closes. The qualified exchange accommodation agreement is due within five business days after the titleholder takes title.

After closing. File Form 8824 with the return. For a client whose chain includes California, Oregon, or Montana property, continue those States' obligations described in Chapter 58. Where Maryland withholding was taken, remember that a tentative refund may be requested no earlier than 60 days after the deed is filed and no later than December 1, and is unavailable for sales over $1,500,000.¹⁸

Open questions to disclose to clients. Three Maryland questions in this Part do not have settled answers, and a client relying on a particular answer should be told so in writing. The first is whether a foreign entity registered in Maryland is a nonresident entity for withholding, given the differing language in current Comptroller publications (59.3). The second is whether deferred gain on Maryland property is Maryland-source income when a nonresident later recognizes it after exchanging into property elsewhere; Maryland has not published a continuing report or clawback rule comparable to the regimes in Chapter 58, and none has been identified, but the absence of a published rule is not a published answer. The third is whether a ground rent holder can direct redemption proceeds administered by the Department to an intermediary (61.4).