1031 Exchange in Maryland: What Investors Need to Know in 2026

This article is for educational purposes only and is not tax, legal, or investment advice. 1031 exchange rules and Maryland tax law are complex and change frequently — consult a qualified Maryland CPA, tax attorney, and qualified intermediary before initiating any exchange.

Most Maryland real estate investors have heard of the 1031 exchange. Fewer understand exactly how it works, what it requires, and where it most commonly goes wrong.

That gap is expensive. A 1031 exchange executed correctly can defer tens of thousands of dollars in capital gains taxes on a Maryland investment property sale — money that stays in your portfolio compounding rather than going to the IRS and the Maryland Comptroller. A 1031 exchange executed incorrectly, or one that falls apart because a deadline was missed or a rule was misunderstood, produces a tax bill that could have been avoided entirely.

After nearly 20 years in Maryland real estate and 14 years working with investors across Baltimore City, Baltimore County, Howard, Carroll, and Frederick counties, I've watched both outcomes play out. This is the guide I wish every Maryland investor had before they started the process — updated for the significant Maryland tax changes that took effect in 2025 and 2026.

TL;DR: A 1031 exchange allows you to defer capital gains taxes on the sale of an investment property by rolling the proceeds into a like-kind replacement property within strict IRS deadlines. The rules are specific, the timelines are unforgiving, and the Maryland-specific tax picture — which now includes higher state income tax brackets, a new 2% capital gains surcharge for high earners, and an increased nonresident withholding rate — adds a layer most national guides don't cover. Done correctly, it remains one of the most powerful wealth-building tools available to any real estate investor.

What a 1031 Exchange Actually Is

Section 1031 of the Internal Revenue Code allows an investor to sell an investment property and defer federal capital gains taxes on the profit — as long as the proceeds are reinvested into a like-kind replacement property following specific rules and within specific timeframes.

The word "defer" is important. A 1031 exchange does not eliminate capital gains taxes permanently. It postpones them. The deferred gain carries forward into the replacement property's cost basis. When you eventually sell that replacement property without another exchange, the accumulated deferred gain becomes taxable. Many investors use successive exchanges to defer taxes indefinitely, and some hold until death, at which point heirs may receive a stepped-up basis under current law that can effectively eliminate the deferred gain entirely.

It's also worth noting that since the Tax Cuts and Jobs Act of 2017, Section 1031 applies only to real property. Personal property exchanges — equipment, vehicles, artwork, and similar assets — no longer qualify.

The capital gains tax exposure a 1031 exchange defers is meaningful. Federal long-term capital gains rates run 0%, 15%, or 20% depending on your income level. Maryland taxes capital gains as ordinary income at the state level, and as of the 2025 tax year, the state added new top brackets of 6.25% and 6.5% for higher-income taxpayers, plus a separate 2% capital gains surcharge for individuals with federal adjusted gross income (FAGI) over $350,000. Local Maryland income taxes — which also apply to capital gains — now range up to 3.3%. On a Baltimore City rowhome purchased at $80,000 and sold at $180,000 after depreciation recapture is calculated, the combined federal and Maryland tax bill without a 1031 exchange can easily approach $30,000 to $45,000 or more depending on your income level. That is the number the exchange keeps working for you.

The Like-Kind Requirement

The term "like-kind" sounds more restrictive than it actually is in practice.

For real estate, like-kind means any real property held for investment or business use exchanged for any other real property held for investment or business use. A Baltimore City rowhome can be exchanged for a Carroll County single-family rental. A Frederick County duplex can be exchanged for a commercial warehouse. A Maryland investment property can be exchanged for one in any other state.

What does not qualify: your primary residence, a vacation home used primarily for personal use, property held primarily for sale rather than investment (such as fix-and-flip inventory), and property outside the United States.

The flexibility of the like-kind definition opens strategic possibilities that many Maryland investors don't consider. An investor who has spent years managing Baltimore City rowhomes can use a 1031 exchange to transition into a triple-net lease commercial property, a multifamily property in a different market, or a Delaware Statutory Trust that provides passive real estate exposure without landlord responsibilities. The exchange is not just a tax tool — it is a portfolio repositioning tool.

The Rules That Cannot Be Bent

The IRS is specific about what a valid 1031 exchange requires, and the timelines are among the most unforgiving in the tax code. Missing any of these requirements by a single day can eliminate the exchange entirely.

The relinquished property — the one you are selling — must have been held for investment or productive use in a trade or business. The IRS looks unfavorably on properties held for very short periods before exchange. While there is no statutory minimum hold period, a property held for less than one year tends to raise questions, and many tax advisors recommend a two-year hold as a conservative benchmark. Discuss your specific holding period with your CPA.

You must use a qualified intermediary. You cannot receive the sale proceeds yourself, even briefly. The moment the sale proceeds touch your hands or your bank account, the exchange is disqualified. A qualified intermediary is an independent third party who holds the proceeds between the sale of the relinquished property and the purchase of the replacement property. Selecting a reputable, financially stable qualified intermediary is one of the most important decisions in the entire process — QI failures have cost investors their entire exchange proceeds.

The 45-day identification deadline is the first hard stop. From the date you close on the sale of your relinquished property, you have exactly 45 calendar days to identify potential replacement properties in writing to your qualified intermediary. No extensions. No exceptions except for federally declared disasters.

You can identify up to three properties of any value under the three-property rule, or any number of properties whose combined value does not exceed 200% of the relinquished property's value under the 200% rule. Most investors use the three-property rule. The properties you identify do not all have to be purchased — but your replacement property must be one of the properties on your identification list.

The 180-day exchange period is the second hard stop. You must close on your replacement property within 180 calendar days of closing on the relinquished property. This deadline runs concurrently with the 45-day identification window, not consecutively. Your total exchange window from sale closing to replacement closing is 180 days.

One tax filing note: if your 180-day window extends beyond the April 15 tax filing deadline for the year in which you sold the relinquished property, you must file a tax extension to preserve the full 180 days. Failing to file an extension can shorten your replacement window to the tax filing deadline.

The replacement property must be of equal or greater value, and you must reinvest all of the net proceeds. If you purchase a replacement property of lesser value or if you pull any cash out of the exchange — called "boot" — the boot is taxable in the year of the exchange. You can add cash to an exchange to trade up in value. You cannot take cash out without tax consequences.

The Maryland-Specific Tax Picture (Updated for 2025–2026)

Most national 1031 exchange guides focus entirely on federal tax deferral. Maryland investors have several additional layers to understand — and the picture has changed significantly in the last year.

Maryland income tax brackets. Maryland taxes capital gains as ordinary income. Under the Budget Reconciliation and Financing Act of 2025 signed by Governor Wes Moore, Maryland added two new top brackets effective for the 2025 tax year and beyond: 6.25% on taxable income from roughly $500,001 to $1 million (single filers) and 6.5% on taxable income above $1 million. The previous top rate of 5.75% still applies to most middle-income investors, but high-earning Maryland investors now face a higher state rate than they did before.

The 2% Maryland capital gains surcharge. This is the most significant change for high-income real estate investors and is easy to miss. Effective for the 2025 tax year and beyond, Maryland imposes an additional 2% surtax on net capital gains for any individual with federal adjusted gross income above $350,000, regardless of filing status. The surtax applies on top of the regular state and local income tax rates. There is a carve-out for the sale of a primary residence sold for less than $1.5 million, but investment property sales receive no such exemption. For a Maryland investor who sells an investment property and triggers a large capital gain that pushes FAGI above $350,000, the 2% surcharge can add several thousand dollars to the state tax bill on a single sale — a strong additional reason to consider a 1031 exchange.

Local Maryland income tax. Each Maryland county and Baltimore City levies a local income tax on top of the state rate, applied to capital gains the same as wages. Local rates for 2026 range from 2.25% (Worcester County) up to 3.30% (the new ceiling, with several counties at or near it). Most major investor markets — Baltimore City, Baltimore County, Howard County, Montgomery County, and Prince George's County — are at 3.20%. Verify the current local rate for your specific jurisdiction before running the numbers.

Maryland nonresident withholding (updated January 1, 2026). This is particularly important for out-of-state investors who own Maryland property. As of January 1, 2026, Maryland requires withholding of 8.75% of net proceeds for nonresident individuals, estates, and trusts (up from the prior 8% rate), and 8.25% for nonresident entities, at closing — regardless of whether the gain is being deferred through a 1031 exchange. Nonresident investors must apply for a Certificate of Full or Partial Exemption from the Maryland Comptroller if they intend to complete a 1031 exchange. The Comptroller requires the application to be submitted at least 21 days before closing. Missing this step means Maryland withholds a significant portion of your proceeds at closing — money that is exceptionally difficult to recover in time to meet your exchange deadlines.

Maryland resident investors do not face the withholding issue but still need to account for Maryland state and local capital gains tax deferral in their exchange planning. The state generally follows the federal 1031 treatment for Maryland residents, so the deferred gain carries forward into the replacement property's Maryland tax basis.

Common Ways Maryland 1031 Exchanges Fail

The 45-day identification window is missed. Forty-five days sounds like enough time. In practice, identifying suitable replacement properties, conducting due diligence, and submitting a written identification to the qualified intermediary within 45 days of closing requires preparation that begins before the relinquished property goes under contract. Investors who start identifying replacement properties after closing consistently run out of time.

The qualified intermediary is not selected before closing. The QI must be in place before the relinquished property closes. You cannot select a QI after closing and retroactively qualify the exchange. This is a preparation step that has to happen early in the listing process, not the week of closing.

Boot is received unintentionally. Investors who don't fully understand the reinvestment requirement sometimes take out cash for repairs, closing costs, or other expenses without realizing it constitutes taxable boot. Work through the exchange math with your CPA and your QI before closing on both the relinquished and replacement properties.

The replacement property falls through under contract. If your identified replacement property falls out of contract and you have not identified backup properties, you may have no valid replacement option within the 180-day window. Always identify the maximum number of properties allowed under your identification rule.

The Maryland nonresident withholding exemption is not filed in time. Out-of-state investors who have been acquiring Maryland properties for years sometimes discover the withholding requirement for the first time when they are already under contract on a sale. The exemption certificate process takes a minimum of 21 days and must be initiated well before closing.

The 2% capital gains surcharge is overlooked in planning. Investors who don't realize the surcharge applies until they receive their tax bill the following April are sometimes surprised by an unexpected liability. If a sale or a partial exchange (with boot) will push your FAGI above $350,000, run the numbers with your CPA before closing.

The Delaware Statutory Trust Option

For Maryland investors who want to complete a 1031 exchange but don't want to acquire and manage another active investment property, the Delaware Statutory Trust deserves specific mention.

A DST is a professionally managed fractional ownership interest in institutional-grade real estate — typically stabilized commercial properties, multifamily complexes, or net lease portfolios. DST interests qualify as like-kind replacement property for 1031 exchange purposes, allowing an investor to exchange out of an active Baltimore rowhome portfolio into a passive fractional interest in a large commercial property managed by institutional operators.

The appeal for Maryland investors who are approaching retirement, who are fatigued by active management, or who want to diversify geographically without the complexity of direct property management is significant. The tradeoffs include illiquidity — DST interests cannot easily be sold on a secondary market — and the fact that you give up direct control over the investment. DSTs are securities and must be offered through a registered broker-dealer, and they are typically restricted to accredited investors.

For the right investor at the right stage of their portfolio journey, the DST is one of the most underutilized 1031 exchange tools available.

The Depreciation Recapture Issue

No discussion of 1031 exchanges is complete without addressing depreciation recapture, because it catches investors off guard more consistently than any other element of the tax picture.

When you own a residential rental property, you depreciate it over 27.5 years, taking an annual deduction that reduces your taxable rental income. Commercial real estate depreciates over 39 years. That depreciation reduces your cost basis in the property. When you sell, the IRS recaptures the portion of your gain attributable to depreciation at a federal rate of up to 25% — meaningfully higher than the long-term capital gains rate that applies to the rest of the gain.

A 1031 exchange defers both the capital gains tax and the depreciation recapture tax. But the accumulated depreciation carries forward into the replacement property's basis, meaning the recapture liability grows over successive exchanges rather than disappearing. Understanding your accumulated depreciation before you plan an exchange is essential to understanding the true tax liability you are deferring — and the stepped-up basis opportunity under current law that makes holding until death so compelling for long-term investors.

How the Exchange Affects Your Maryland Market Strategy

For Maryland investors, the 1031 exchange is not just a tax tool — it is a strategic rebalancing mechanism that the state's specific market dynamics make particularly useful in 2026.

Carroll County, for example, posted approximately 11.7% year-over-year price growth as of February 2026 according to Redfin data, meaning investors who acquired properties in this corridor several years ago are sitting on gains that would produce significant tax bills if sold outright — particularly if the gain pushes them above the $350,000 FAGI threshold for the new 2% surcharge. A 1031 exchange allows those investors to redeploy that equity into larger multifamily properties, different geographic markets, or asset classes with better passive income characteristics — without surrendering a substantial portion of the gain to combined federal, state, and local taxes plus the surcharge.

Baltimore City investors who have successfully executed the BRRRR strategy and built a portfolio of rowhomes may find that a 1031 exchange into a small multifamily property in Hamilton-Lauraville or a commercial net lease property produces better risk-adjusted returns and lower management intensity than continuing to add single-family rowhomes at current price levels.

Frederick County investors who acquired land or residential properties in the Urbana corridor during the early appreciation phase of that market's development cycle are in a position where a well-structured exchange could redeploy substantial deferred gains into assets with significantly different income profiles.

Questions I Hear a Lot

Can I do a 1031 exchange on my primary residence? No. Section 1031 applies to investment and business-use property only. Your primary residence does not qualify. However, if you have converted a former primary residence to a rental property and held it as a rental for a sufficient period — generally at least two years is the conservative standard — it may qualify as investment property for exchange purposes. Consult a Maryland CPA before assuming a converted primary residence qualifies.

Can I exchange into a property I intend to use as a vacation home? The IRS provides safe harbor guidance (Revenue Procedure 2008-16) for vacation and second-home properties used in exchanges. In general, the replacement property must be rented at fair market rates for at least 14 days per year, and your personal use must not exceed 14 days or 10% of the days it is rented (whichever is greater) during each of the two 12-month periods following the exchange. Vacation home exchanges require careful planning, specific documentation, and professional guidance.

What happens to my 1031 exchange if I die before selling the replacement property? Under current law, your heirs receive a stepped-up basis to the fair market value of the property at the date of your death. The accumulated deferred gain — which could represent decades of successive exchanges — may be eliminated entirely. This is the outcome that makes long-term 1031 exchange strategies so compelling for estate planning purposes, though estate tax law can change and large estates have other considerations.

Can I exchange out of Maryland into another state? Yes. The like-kind requirement does not restrict exchanges to properties within the same state. Maryland investors regularly exchange into properties in Florida, Texas, the Carolinas, and other markets with different tax and appreciation profiles. The Maryland nonresident withholding issue applies if you are selling a Maryland property regardless of where the replacement property is located.

How do I find a qualified intermediary in Maryland? QIs are not regulated at the federal level, and regulation varies by state. Maryland does not have specific QI licensing requirements. Look for a QI that carries fidelity bond and errors-and-omissions insurance, maintains exchange funds in segregated accounts rather than commingled accounts, and has documented experience with Maryland transactions. Your real estate attorney or CPA is the best source of referrals for reputable Maryland QIs.

The Team You Need to Execute This Correctly

A 1031 exchange is not a transaction you navigate without professional guidance. The complexity of the rules, the unforgiving deadlines, and the Maryland-specific tax layer — which became materially more complex in 2025 and 2026 — make the cost of professional advice trivial relative to the tax deferral at stake.

You need a Maryland CPA who understands real estate taxation and the new state surcharge rules, and who can calculate your exact deferred gain, your depreciation recapture exposure, and the optimal exchange structure for your specific situation before you list the relinquished property.

You need a qualified intermediary selected and under agreement before your relinquished property closes — not the week of closing.

You need a real estate agent with Maryland investment market knowledge who can help you identify suitable replacement properties within the 45-day window, understands the exchange timeline's effect on your negotiating position, and can move quickly when the right replacement property appears.

And you need a real estate attorney to review the exchange documents, the replacement property title, and any Maryland-specific compliance issues — including the nonresident withholding exemption process if applicable — before you close on either side of the transaction.

The 1031 exchange remains one of the most powerful tools in any Maryland real estate investor's arsenal. The investors who use it effectively are the ones who assembled the right team before they needed them — not after the 45-day clock had already started running.