Maryland Exit Tax 2026: What Sellers Actually Owe

If you've searched "Maryland exit tax," you've likely just gotten an unpleasant surprise at a real estate closing: a large chunk of your sale proceeds withheld because you no longer live in Maryland. There is no Maryland law called an "exit tax" — the term is informal shorthand real estate agents and title companies use for Maryland's nonresident real property withholding tax, created under §10-912 of the Tax-General Article, Annotated Code of Maryland. It functions much like the federal FIRPTA withholding rule for foreign sellers, except it applies to any nonresident of Maryland (individual, trust, estate, or business entity) selling Maryland real estate, regardless of nationality.

This guide is a focused, deep dive on that withholding rule specifically: the exact 2026 rate, how the withholding amount is calculated, which sales are exempt, what forms are involved, and — most importantly — how this withholding reconciles with the tax you actually owe when you file your Maryland return. If you're researching Maryland's broader income tax, county tax, or estate tax rules for a full departure from the state, see our companion Moving From Maryland Tax Guide, which covers residency rules, the two-layer state + county income tax, and the separate $5 million Maryland estate tax in depth.

What Is Maryland's "Exit Tax" — And Why Isn't It a Real Separate Tax?

Despite the popular nickname, there is no Maryland statute titled "exit tax." What sellers actually encounter is a withholding requirement: when a nonresident individual or nonresident entity sells real property located in Maryland, the deed transferring ownership cannot be recorded with the Clerk of the Circuit Court (or the State Department of Assessments and Taxation) unless a portion of the sale proceeds is withheld and paid to the state at closing. This has been Maryland law since October 1, 2003, under §10-912 of the Tax-General Article.

The mechanism is conceptually identical to the federal FIRPTA (Foreign Investment in Real Property Tax Act) withholding that applies when a foreign person sells US real estate — money is withheld up front as a hedge against the seller skipping town without paying tax on the gain. The difference is that Maryland's rule applies to any nonresident of Maryland, including US citizens who simply live in Virginia, Pennsylvania, Florida, or any other state and happen to own Maryland real property (a former primary home, a rental property, an inherited house, a vacation property, etc.).

Because the money is withheld before you've even calculated your actual tax liability, it can feel like an extra, punitive tax on departing residents — hence "exit tax." In reality, it is a prepayment toward whatever Maryland income tax you legitimately owe on the sale, reconciled when you file your Maryland nonresident tax return for that year.

How Much Is Withheld From a Maryland Real Estate Sale in 2026?

The withholding rate depends on whether the seller is an individual or a business entity, and it changed in 2025:

The individual rate rose from the long-standing 8.0% to 8.75% because Maryland's 2025 Budget Reconciliation and Financing Act (BRFA) raised the state's highest marginal income tax rate — and by statute, the nonresident individual withholding rate is defined as the sum of the lowest county income tax rate plus the highest marginal state income tax rate. The entity rate is tied to the corporate income tax rate and did not change.

Both rates appear on the current versions of Form MW506NRS (Maryland Return of Income Tax Withholding for Nonresident Sale of Real Property), Form MW506AE (exemption application), and Form MW506R (tentative refund application) for 2026.

A New Wrinkle for High-Value Sales: The 2% Capital Gains Surtax

The same 2025 legislation added an additional 2% Maryland tax on net capital gains for individuals and fiduciaries whose federal adjusted gross income exceeds $350,000. There's a carve-out: capital gains from selling a primary residence (including the land and any accessory dwelling units) for less than $1,500,000 are excluded from this extra 2%. This surtax is calculated on your actual Maryland return (via Form 502CG), not built into the withholding rate itself — but it's a reason high-income sellers of investment or second properties may owe more than the withheld amount at tax time, not less.

Also as of the 2025 changes, sellers whose sale price is $1,500,000 or more are no longer eligible to apply for the tentative early refund (Form MW506R) described later in this guide — they must wait for the annual Maryland income tax return to claim any refund.

How Is the Withholding Amount Actually Calculated?

A common misconception is that the withholding percentage is applied to the full sale price. It isn't. Maryland law defines the withholding base as the "total payment" — the total sales price minus (1) any mortgage or other lien debt being paid off at closing and (2) other seller expenses disclosed on the settlement statement (agent commissions, transfer taxes paid by the seller, etc.). The fair market value of any non-cash property received is added back in.

Form MW506NRS walks the settlement company through the calculation:

Worked Example: $500,000 Sale, Nonresident Individual

Assume a nonresident individual sells a Maryland rental property for $500,000, pays off a $200,000 mortgage balance at closing, and incurs $30,000 in selling expenses (agent commission, transfer/recordation taxes, title fees):

• Total sales price: $500,000
• Less selling expenses: −$30,000
• Net sales price: $470,000
• Less mortgage payoff: −$200,000
• Total payment (withholding base): $270,000
• Withholding at 8.75%: $23,625 withheld at closing

Note this $23,625 is withheld regardless of the seller's actual taxable gain on the property (sale price minus adjusted cost basis) — which is usually much lower than the total payment. That mismatch is exactly why the withholding often exceeds the real tax owed, and why the refund/reconciliation process described below matters.

One planning trap: a second mortgage or refinance taken out within 90 days of the sale is presumed to be "debt incurred in contemplation of sale" and cannot be subtracted from the sales price when calculating total payment — only pre-existing, longer-standing liens qualify.

Can You Avoid or Reduce the Withholding?

Maryland provides several statutory exemptions from the withholding requirement. Some apply automatically if properly documented on the deed; others require filing Form MW506AE (Application for Certificate of Full or Partial Exemption) with the Comptroller at least 21 days before closing — this lead time exists because the Comptroller needs time to review and issue a certificate before settlement, and applications filed closer to closing are not guaranteed to be processed in time.

Exemptions That Don't Require Prior Approval

• Maryland resident certification — a sworn statement in the deed or an attached affidavit that the seller is a Maryland resident (or resident entity)
• Principal residence exemption — the property qualifies as the seller's principal residence under IRC Section 121 (the same rule behind the federal $250,000/$500,000 home-sale gain exclusion) and is listed as the seller's principal residence with the Maryland Department of Assessments and Taxation (SDAT). This must be certified under penalty of perjury in the deed or an accompanying affidavit
• Foreclosure or deed in lieu of foreclosure — no withholding applies
• Government transferor — the property is transferred by the United States, the State of Maryland, or a political subdivision
• Zero-consideration transfers — gifts between spouses, parents adding children to a deed, and similar transfers where the deed states the consideration paid is $0

Exemptions Requiring Form MW506AE (21+ Days Before Closing)

• A Comptroller-issued certificate stating no tax is due, or a reduced amount is due (Form MW506E), for example when the actual capital gain is far below what the "total payment" formula would otherwise imply
• Like-kind (Section 1031) exchanges
• Installment sales where at least one payment is scheduled after the end of the tax year — withholding can be limited to what the seller actually receives within 60 days of closing
• A former Maryland resident's home no longer listed as a principal residence with SDAT after a move — this requires the MW506AE route rather than the automatic exemption
• "Zero proceeds" co-owners — for example, a child added to a parent's deed purely for estate-planning purposes who will receive none of the sale proceeds

Because the exemption rules are technical and the paperwork is time-sensitive, sellers who believe they qualify should start the MW506AE process as soon as a sale is under contract — waiting until near closing risks having the exemption request processed too late.

Is the Withholding the Same as Your Final Maryland Tax Bill?

No — and this is the most misunderstood part of the "exit tax." The amount withheld at closing is an estimated tax payment, not a final tax. Every nonresident who sells Maryland real property must still file a Maryland income tax return for the year of the sale reporting the actual gain (or loss), and the withheld amount is claimed as a credit against that liability:

• Individuals and revocable living trusts file Form 505 (Nonresident Maryland Income Tax Return) and claim the MW506NRS withholding as an estimated payment
• C corporations file Form 500 (Maryland Corporation Income Tax Return)
• S corporations, partnerships, LLCs, and business trusts file Form 510 (Pass-Through Entity Income Tax Return) and allocate the credit to owners via a modified Schedule K-1
• Estates and trusts file Form 504 (Fiduciary Income Tax Return)

If withholding exceeds the tax actually owed — which is common, since the calculation is based on the total payment amount rather than the taxable gain — the seller can request the difference back in one of two ways:

1. Tentative refund (Form MW506R): filed 60 days or more after the withholding payment was made, for closings on or before November 1 of the sale year, and only if the sale price was under $1,500,000 (the 2025 legislation removed eligibility for sales at or above that threshold). This route gets money back faster than waiting for the annual return.
2. Annual Maryland tax return: everyone else — including sales of $1,500,000 or more and any closing after November 1 — must wait and claim the refund when filing their nonresident Maryland return for the year.

Either way, filing the Maryland return is mandatory even if the full withheld amount is refunded — skipping the return does not automatically release the money.

Does This Apply to LLCs, Estates, and Multiple Owners?

LLC and business-entity ownership: An LLC, corporation, partnership, or business trust is treated as a "nonresident entity" — and subject to the 8.25% withholding — if it was not formed under Maryland law, or is not registered/qualified to do business in Maryland, more than 90 days before the sale date. A Maryland-registered LLC can certify Maryland-resident-entity status to avoid withholding; an out-of-state LLC generally cannot.

Estates: Withholding for an estate depends on where the decedent was domiciled at death, not where the personal representative (executor) lives. If the decedent was domiciled in Maryland at death, the estate is a "resident fiduciary" and can sign an Affidavit of Residence (WH-AR) to avoid withholding — even if the executor now lives in another state. If the decedent was domiciled outside Maryland, the estate is a nonresident fiduciary subject to withholding, and opening an ancillary probate proceeding in a Maryland county does not change that.

Multiple owners: Each owner's residency is assessed separately. If a Maryland property is co-owned by a Maryland resident and a nonresident, withholding applies only to the nonresident's proportional share of the total payment — a separate Form MW506NRS is completed for each nonresident owner (spouses filing a joint Maryland return are the exception and can use one combined form).