Capital Gains Tax on Home Sale in Maryland

Selling a home in Maryland can trigger capital gains tax if you profit from the sale.

Whether you owe federal or state tax depends on where the home fits in your tax profile, how long you owned and lived in it, and your total income.

Here’s how capital gains tax works when selling a home in Maryland.

How Capital Gain Is Calculated

Capital gain is the amount you profit when you sell your home. It’s calculated as:

Sale price
minus
Your adjusted basis (purchase price plus improvements minus selling costs)

Only the profit — not the full sale price — is potentially taxable.

Federal Home Sale Exclusion

For federal tax purposes, many homeowners qualify for an exclusion on the sale of a primary residence.

To qualify, you must:

• Have owned the home for at least two years
• Have lived in the home as your main residence for at least two of the last five years

If you qualify:

• Single taxpayers can exclude up to $250,000 of gain
• Married couples filing jointly can exclude up to $500,000 of gain

Example:
If you bought your Maryland home for $400,000, sold it for $700,000, and had $50,000 in improvements and selling costs, your gain might be $250,000.

As a married couple filing jointly, that $250,000 could be fully excluded from federal tax.

If your gain exceeds these limits, the excess is taxable federally at long-term capital gains rates (0%, 15%, or 20%) depending on income.

Maryland State Capital Gains Tax

Maryland does not have a separate capital gains tax rate. Instead, gains are treated as ordinary income and taxed under the state’s income tax system.

Maryland’s state income tax brackets currently range from roughly 2% up to 5.75%, depending on your taxable income.

In addition to the state rate, every Maryland county and Baltimore City also levy a local income tax, which typically ranges from about 2.25% to 3.20%.

That means any taxable gain left after the federal home sale exclusion is added to your Maryland taxable income and taxed at your marginal state and local rates.

Example:
If you have $100,000 in taxable gain after federal exclusions, that amount would be subject to Maryland income tax rates up to 5.75% plus the applicable county rate, increasing your total state tax bill.

New 2% Surtax on Net Capital Gains for High Earners

Beginning with tax years after 2025, Maryland has introduced an additional 2% tax on net capital gains for individuals whose federal adjusted gross income (FAGI) exceeds certain high-income thresholds.

This surtax generally applies to capital gains included in Maryland income. However, there are important exceptions:

• Capital gains from the sale of a primary residence sold for less than $1.5 million generally are exempt from the 2% surtax.
• Gains from certain retirement accounts or qualified plans are also excluded.

This means that most typical home sales by Maryland residents will not be subject to this additional 2% surtax, though high-income taxpayers with capital gains from other assets may see the extra tax apply.

What If It’s Not Your Primary Residence?

If the home you’re selling was a second home, vacation property, or rental, the federal home sale exclusion usually does not apply. In that case:

• Federal capital gains tax applies to the full gain (subject to long-term rates if owned more than one year)
• Maryland taxes the gain as ordinary income at state and local rates
• Depreciation recapture may apply if the property was used as a rental

Investment or non-primary residences typically result in greater tax liability than primary residences.

Timing and Holding Periods

For federal taxation, how long you’ve owned your home affects the tax rate:

• Short-term gains (sold within one year) are taxed at ordinary federal income tax rates.
• Long-term gains (owned more than one year) are taxed at preferential long-term capital gains rates (0%, 15%, 20%, depending on income).

Maryland does not differentiate between short- and long-term gains — all gains are taxed as ordinary income for state purposes.

How to Reduce Capital Gains Tax

You may reduce taxable gain by:

• Keeping detailed records of home improvements to increase your basis
• Ensuring you meet the ownership and use tests for the federal exclusion
• Reporting closing and selling costs properly
• Timing the sale in a lower-income year

Proper documentation of improvements and costs can reduce your total taxable gain.

💻 Electronic Filing Recommendation

E-filing your tax return after a home sale is recommended because:

• Tax software automatically calculates gain and applies exclusions
• Forms such as Schedule D and Form 8949 are prepared for you
• Errors are reduced, and processing is faster
• State and local tax forms are integrated with federal reporting

Software can help ensure you report the sale correctly for both federal and Maryland return purposes.

Final Thoughts

When selling a home in Maryland, whether you owe tax depends on whether the home was your primary residence and how much profit remains after the federal home sale exclusion.

Gains that exceed the federal exclusion are taxed as ordinary income by Maryland at state and local rates.

High-income taxpayers may also encounter Maryland’s 2% surtax on net capital gains — though gains from the sale of a primary residence under $1.5 million are generally exempt from that surtax.