1031 Exchange Not Recognized by State (MD) When Replacement Property is out of state

[rha9]

I sold a MD property in 2022 in a 1031 Exchange with an our of state property as the replacement,  I have to pay MD tax on the gain, so my state income is higher than my federal income.  Not sure how to handle this as this income doesn't show up at all on my federal tax form which feeds the MD form and I don' see a specific MD form to handle this transaction.

Any thoughts from users much appreciated. 

[dmertz]

"I have to pay MD tax on the gain"

Are you sure about that?  I'm unable to find anything to support the belief that there is includible in Maryland income any part of any 1031 exchange beyond what might be included in federal income.  Maryland has a tax withholding requirement on the sale of real property unless an exemption application is approved, but that doesn't mean that the transaction is taxable.

[rha9]

Yes, there is a withholding requirement on a non-resident.  but I was told (by what I thought was a good authority) that if the replacement property is not in MD then the Federal 1031 would not be recognized.   I too cannot find anything on that in writing, which I am also trying to do.

[dmertz]

I suggest reviewing the Additions to Income section of the Maryland nonresident booklet (Form 505 Instructions):  https://marylandtaxes.gov/forms/22_forms/Nonresident_Booklet.pdf