Will I Owe Maryland Capital Gains Tax on My Assets?

Understanding whether you’ll owe capital gains tax in Maryland is vital for financial planning. These taxes can affect the net proceeds from selling assets, and knowing your obligations helps avoid unexpected liabilities. This is particularly relevant for residents involved in real estate, securities, or other investments.

Maryland’s tax system has different rates and rules for various types of gains. Understanding these nuances is key to ensuring compliance and optimizing your tax strategy.

Rate Structure for Gains

Maryland treats capital gains as ordinary income, subject to the state’s progressive income tax rates, which range from 2% to 5.75% as of 2024. The rate depends on total taxable income, including capital gains. For those in the highest income bracket, the rate is 5.75%. Local taxes, varying by county, can further increase the effective tax rate. For example, Baltimore City residents face an additional 3.2% local tax, potentially bringing the combined rate to 8.95%.

Types of Taxable Gains

Capital gains in Maryland are categorized by the type of asset sold, each with specific considerations. The main categories include real estate, securities, and other assets, all taxed as ordinary income.

Real Estate

Capital gains from real estate are calculated as the difference between the sale price and the property’s adjusted basis, which includes the purchase price and improvements. Maryland residents report these gains as ordinary income. Federal tax provisions, such as the exclusion under Internal Revenue Code (IRC) Section 121—up to $250,000 for single filers and $500,000 for married couples on the sale of a primary residence—can reduce the taxable amount. Real estate investors should also account for depreciation recapture, which increases taxable income upon sale.

Securities

Gains from the sale of securities, such as stocks and bonds, are taxable in Maryland. These gains are the difference between the sale proceeds and the cost basis, adjusted for factors like stock splits and dividends. Unlike federal tax law, which distinguishes between short-term and long-term gains, Maryland treats all gains as ordinary income regardless of the holding period. Accurate records of purchase and sale dates, as well as cost basis adjustments, are crucial for compliance.

Other Assets

Capital gains from other assets, such as collectibles, business interests, or personal property, are also subject to Maryland’s income tax. The gain is the difference between the sale price and the adjusted basis of the asset. For collectibles, federal law imposes a higher maximum rate of 28% on long-term gains, but Maryland taxes such gains as ordinary income. Business owners selling interests in partnerships or corporations must consider IRC Section 751, which requires recognizing ordinary income for certain assets. Proper valuation and documentation are essential for accurate reporting.

Exemptions or Exclusions

Certain exemptions and exclusions can reduce capital gains tax obligations in Maryland. The federal exclusion under IRC Section 121 allows individuals to exclude up to $250,000 of gain from the sale of a primary residence ($500,000 for married couples), which applies to Maryland taxpayers as well.

Gains from qualified distributions of Roth IRAs are exempt from taxation, aligning Maryland with federal treatment. This highlights the benefit of using tax-advantaged accounts for long-term investment growth.

Maryland also adheres to federal guidelines for the exclusion of gains from the sale of qualified small business stock (QSBS) under IRC Section 1202. This exclusion, which can be up to 100% of the gain for stocks held more than five years, provides a tax incentive for investing in small businesses.

Withholding Obligations

Maryland requires non-resident sellers of real estate to have a portion of the sale proceeds withheld to cover potential state tax liabilities. The withholding rate is 7.5% for non-resident individuals and 8.25% for non-resident entities, calculated on the total payment to the seller.

For residents, there is no state-mandated withholding on capital gains from securities or other personal assets. However, individuals must ensure their estimated tax payments account for significant gains to avoid underpayment penalties. Aligning estimated payments with anticipated gains can prevent penalties and interest charges.

Filing Requirements and Documentation

Maryland residents must report capital gains on their state income tax return using Form 502. Non-residents with Maryland-sourced gains must use Form 505 and include the Nonresident Income Tax Calculation Worksheet.

Accurate documentation is vital for proper reporting. Taxpayers should keep detailed records of all transactions, such as purchase agreements, closing statements, and receipts for improvements or expenses. For securities, brokerage statements showing purchase and sale dates, cost basis, and adjustments are essential. Taxpayers claiming federal exclusions or deductions, such as the primary residence exclusion under IRC Section 121, must provide evidence of eligibility, such as proof of residency and ownership duration. Proper documentation ensures compliance and supports accurate tax calculations.