Wherever you are in the home buying, selling, or ownership process, understanding your state and local tax scheme is an important part of real estate transactions. Property taxes can vary widely based on what state you’re in, so it’s important to know exactly what you’re getting yourself into before you get too far along in the buying or selling process.
By understanding the ins and outs of Maryland real estate taxes, you can ensure that there are no surprises.
Will You Have to Pay Taxes When You Sell Your Home in Maryland?
At the federal level, most people who profit from home sales don’t need to pay taxes on the profit — with some exceptions.
Whether or not you have to pay taxes on your gains depends on whether the home you’re selling was your primary residence and how long you lived there. If you lived in your home for at least 2 years and are making less than $250,000 (or $500,000, if you’re a married couple) net on the sale, you generally don’t have to pay taxes on your gains.
The requirements to qualify for tax-free gains on your home sale are:
- You’ve owned the house for at least two years;
- You resided in the house as your main residence for at least two years;
- In the two-year period following your purchase, you didn’t exclude gains from the sale of another home; and
- You are gaining less than $250,000 (if single) or $500,000 (if married) from the sale.
If you’re a married couple wanting to take advantage of the $500,000 limit, you have to file a joint tax return, at least one spouse must meet the two-year ownership requirement, and both spouses must have lived in the house for at least two years.
To calculate the amount you’re gaining from the sale, add up the amount you paid for the house and the amount you put into improvements and renovations, then deduct that from what you sold the property for.
Maryland conforms to the federal rule on taxing gains from home sales, so if you’re exempt from paying gains taxes to the IRS, you’ll also be exempt from paying them to the State of Maryland.
How Much Are Real Estate Transfer Taxes in Maryland (and Who Pays Them)?
Maryland Real Estate Transfer Taxes
A transfer tax is a percentage of the sale amount that has to be paid when ownership of property is transferred from one person or entity to another. Real estate transfer taxes can be charged at the state, city, and/or county levels, depending on where you live.
The state transfer tax in Maryland is 0.5% of the sale price. Whether you have to pay a county transfer tax and how much the county transfer tax will be depends on the county your property’s in. County taxes range from 0% in Calvert County to 1.5% in Baltimore County — though Baltimore County also exempts the first $22,000 to calculate the county transfer tax if the home is your permanent residence.
Bottom line: Marylanders will have a state transfer tax of 0.5% of the sale price and need to check with their county and city to see if there will be additional local transfer taxes.
Typically, transfer taxes are split 50/50 between the property seller and buyer, though it can also be part of the negotiation when making or accepting an offer. However, buyers will be exempt from the transfer tax if they are first-time homebuyers in Maryland, meaning the buyer’s half will be waived if they qualify.
How to Calculate Property Taxes in Maryland
No matter where in the state you’re located, property taxes will be calculated as a percentage of the assessed value for the property; but what that percentage is will vary based on where in Maryland you live. In Maryland, all property taxes are collected by local governments, either county or city, but a portion of the taxes collected will go to the state.
In Maryland, assessments are conducted once every three years, and property owners will be informed of any changes to their assessment by late December. The assessment will be for both the property and whatever real estate is located on the property.
To calculate your property taxes, first find your property tax assessment. Divide that by 100. Find your local jurisdiction’s rate and add $0.112 for every $100 in the assessed valuation for state taxes. Then multiply the two numbers.
The end result can vary quite a bit based on your county and city taxes. For example, the total tax for a property assessed at $250,000 in Montgomery County would be $2,335, or 0.934% of the home’s assessed value, while the tax bill for the same property in Baltimore County would be $3,798, or 1.519% of the home’s assessed value.
If you’re a prospective buyer in Maryland, make sure you talk about typical property taxes within your market with your real estate agent. Affording your home is about more than just mortgage rate and homeowners insurance — it’s important to factor in state and local taxes into the equation.
Tax Breaks for Maryland Home Buyers & Sellers
The government likes to encourage home ownership, so there are a number of tax breaks available to buyers and sellers. Whether you’re a buyer or a seller, there may be a tax break available to you!
Tax Breaks and Credits for Buyers
In addition to federal tax breaks, such as the first-time home buyer credit, Maryland has state-specific programs to help homeowners afford their tax bill.
The Maryland Homeowners' Property Tax Credit Program caps the amount of property taxes a person is liable for based on their income. This program allows credits against a homeowner’s property tax bill if the property taxes exceed a fixed percentage of their gross income.
Maryland also offers the Homestead Property Tax Credit, to help homeowners deal with large assessment increases on their principal residence. The Homestead Credit limits the increase in taxable assessments each year to 10% or less per year, based on county.
Tax Breaks and Write-Offs for Sellers
Tax breaks aren’t just for home buyers; sellers can get tax breaks, too.
One of the most common deductions for property sellers is for repairs or improvements related to the sale. This allows you to deduct the cost of repairs and improvements made within 90 days of your closing date.
Homeowners, including sellers, can also deduct mortgage interest for the time the owned the home. Sellers can deduct interest for up to $750,000 of mortgage debt.
Work With Experts
Tax exposure and breaks can vary a lot from region to region, even within a state. Real estate buyers and sellers alike should seek guidance from a certified tax professional (accountant and/or attorney) in order to minimize exposure and maximize savings.
If you need a recommendation for a CPA or tax attorney, ask your real estate agent — local agents are usually familiar with real estate tax experts in their locales.