Maryland 1031 Exchange & Investment Advisors

1031 Exchange in Maryland

Maryland’s 2025 legislative session produced two separate tax increases that hit investment real estate sellers simultaneously. The state added new high-income brackets, bringing the top state income tax rate to 6.50%, up from 5.75%. At the same time, the General Assembly enacted a 2% capital gains surtax that applies to net capital gains for filers with federal adjusted gross income above $350,000. For a Maryland investor who recognizes a $750,000 gain on an investment property sale, the combined exposure now layers federal long-term capital gains at 20%, the 3.8% net investment income tax, the 6.50% state rate, the applicable county income tax averaging 2.85%, and the 2% surtax, producing a combined rate of approximately 35.15%. On a $750,000 gain, that is $263,625 in combined taxes without an exchange. Reviewing the available capital gains tax strategies for a Maryland property sale now means understanding a more complex tax stack than existed even one year ago.

Maryland’s real estate market draws sustained investment from three overlapping drivers: the federal government employment base in the Washington DC suburbs, the Port of Baltimore’s industrial and logistics activity, and one of the largest life sciences research corridors in the country, concentrated in Montgomery County and along the I-270 technology corridor. Commercial and multifamily property owners across Maryland who acquired investment real estate during the low-interest-rate years of 2010 through 2020 have built substantial equity in markets where both rents and values have appreciated meaningfully. That appreciation, realized at the current combined rate structure, represents a substantially larger tax event in 2025 than it would have been in prior years. Understanding what an outright sale looks like compared to an exchange makes the arithmetic of deferral clear for any Maryland investor approaching an exit decision.

Maryland’s county income tax layer adds a dimension of complexity that sellers outside the state often underestimate. Each of Maryland’s 24 counties and Baltimore City sets its own local income tax rate, which applies to the same taxable income as the state rate. County rates range from 2.25% to 3.30%, with the 2025 legislative session raising the allowable maximum from 3.20% to 3.30%. A Montgomery County investor and a Carroll County investor selling the same property type with the same gain face different total effective rates even before the state-level changes are considered. For Maryland sellers weighing an exchange against a taxable sale, the county rate applicable to their county of residence is a material variable in the total tax calculation, not a rounding factor. Available 1031 exchange properties nationally include asset classes and markets with no state or local income tax burden on future gains, which changes the long-term math of where exchange proceeds are reinvested.

Maryland’s 2% Capital Gains Surtax and the 1031 Exchange

The 2% surtax applies to net capital gains “included in Maryland adjusted gross income” for filers with federal adjusted gross income above $350,000. Maryland determines adjusted gross income starting with federal adjusted gross income. Because Maryland conforms to federal 1031 exchange treatment, gains properly deferred through a Section 1031 exchange are not recognized for federal income tax purposes and therefore do not appear in federal adjusted gross income. Gains not in federal AGI do not flow into Maryland adjusted gross income. The practical result is that a properly structured 1031 exchange defers not only the regular Maryland state and county income tax but also the 2% surtax, since the gain is not “included in Maryland adjusted gross income” in the year of the exchange. A Maryland seller with a $750,000 gain who exchanges rather than sells avoids $15,000 in surtax liability along with the $194,625 in federal and state income tax that would otherwise be due, deferring the full $263,625 combined obligation. Understanding the 1031 exchange rules and requirements that produce this result, including the 45-day identification and 180-day closing deadlines, is the starting point for Maryland sellers assessing whether an exchange is the right path.

Maryland commercial and multifamily properties often carry substantial accumulated depreciation that generates recapture liability separate from the appreciation gain. A Maryland office or industrial property held for 10 or more years may have significant cumulative depreciation deductions that create a 25% federal recapture tax on that amount, independent of the capital gains calculation and not subject to the long-term rate. Understanding depreciation recapture on a 1031 exchange and how the exchange defers both the appreciation gain and the recapture in a single transaction is particularly important for Maryland sellers with older commercial properties where straight-line depreciation has run for many years.

Tenants in Common in Maryland

Maryland’s investment real estate market skews toward institutional ownership in the DC suburbs and large-format industrial near the Port of Baltimore, which limits the replacement property inventory available to mid-size exchangers within the 45-day identification window. A Maryland investor selling a $1.5 to $3 million commercial or multifamily property who wants to stay in Maryland real estate may find that qualifying replacement properties at that price point are either off-market or under contract quickly in a market with limited listings. 1031 tenants in common arrangements solve this by pooling a Maryland seller’s exchange proceeds with those of other co-investors to acquire a fractional deeded interest in an institutional-quality commercial asset in markets with broader inventory depth.

Each TIC co-investor holds a separately deeded undivided interest in the replacement property, with independent financing and the right to transfer their interest without the other owners’ consent. For Maryland investors whose exchange proceeds fall between $500,000 and $2 million, a TIC investment provides access to asset classes that would be out of reach at those proceeds levels on a direct acquisition basis. NNN-leased national retail anchored by investment-grade credit tenants, Class A multifamily in high-demand markets, and bulk industrial facilities leased to national logistics operators are common TIC asset types. These assets deliver predictable income without the management obligations of direct commercial property ownership, and they are typically located in markets where vacancy and lease renewal risk are lower than in Maryland’s current commercial environment.

The practical constraint for Maryland sellers pursuing a TIC 1031 exchange is slot availability within the identification window. TIC offerings have a fixed number of investor positions, and those positions fill as sellers across the country reach their 45-day deadlines simultaneously. Maryland sellers need advisors with live sponsor relationships who can confirm available capacity before the deadline rather than during it. Available TIC properties span multiple asset classes and geographies, giving Maryland sellers geographic and property-type diversification from assets they may have held in a single Maryland market for many years.

Delaware Statutory Trust in Maryland

Maryland investors who have owned commercial or multifamily real estate for 15 or more years now face a materially different tax calculation than they did before 2025. The combination of the new 6.50% state rate, the county piggyback tax, and the new 2% surtax means a seller with significant long-term appreciation and income above $350,000 is looking at a combined rate of approximately 35% on a recognized gain. For investors approaching or past retirement who have been managing active Maryland properties and want to convert that equity into passive income, DST real estate provides the path: exchange the Maryland property, defer the full combined tax liability, and begin receiving quarterly income distributions from a professionally managed institutional asset with no property management involvement required.

A DST 1031 exchange replaces the relinquished property with a beneficial interest in a large-format commercial asset managed by a sponsor firm. The investor holds a proportionate share of the trust’s income and appreciation without any operational responsibilities. DST asset types commonly available to Maryland sellers include NNN-leased grocery chains and pharmacies with 15 to 20-year leases requiring no landlord obligations, Class A multifamily communities in high-demand Sun Belt and Southeast markets managed by institutional operators, medical office buildings leased to regional health systems, self-storage portfolios in undersupplied suburban markets, and industrial/logistics facilities with long-term national tenant leases. Maryland investors exchanging out of suburban office or mixed-use properties where the current leasing environment is challenging often find the income stability of NNN or industrial DST assets more predictable than what their relinquished property was generating.

DSTs are structured as securities and require accredited investor status: net worth above $1 million excluding primary residence, or income exceeding $200,000 individually ($300,000 jointly) for the prior two years. Maryland’s high median household income and the substantial appreciation that has built up in DC-area commercial real estate means a large share of Maryland investment property owners qualify. Most Delaware Statutory Trust investments carry individual minimum positions of $100,000 to $250,000, with total asset capitalizations typically between $25 million and $150 million. A Maryland seller with $1 million or more in exchange proceeds can allocate across multiple DST offerings, achieving diversification by asset type and geography while keeping the entire deferred tax liability invested in replacement property rather than flowing to federal, state, county, and surtax obligations.

Maryland sellers evaluating all available paths should review the full range of 1031 exchange alternatives alongside the exchange and DST options. Given the 2025 rate increases, the calculation of what each alternative costs in after-tax proceeds has shifted meaningfully compared to prior years, and the case for deferring now rather than absorbing the current combined rate is more compelling than it was before the legislative session.