If you sell a Bethesda or Montgomery County home while living out of state, Maryland's nonresident withholding tax requires your settlement company to hold back 8.75% of your net proceeds at closing in 2026 (8.25% for business entities). It applies to your total payment—the sale price minus your mortgage payoff and selling costs—not just your profit. You can reduce or eliminate it by filing Form MW506AE with the Comptroller at least 21 days before closing, then reconcile the rest on a Maryland nonresident tax return.
Quick Answer
If you sell a Bethesda or Montgomery County home while living out of state, Maryland's nonresident withholding tax requires your settlement company to hold back 8.75% of your net proceeds at closing in 2026 (8.25% for business entities). It applies to your total payment—the sale price minus your mortgage payoff and selling costs—not just your profit. You can reduce or eliminate it by filing Form MW506AE with the Comptroller at least 21 days before closing, then reconcile the rest on a Maryland nonresident tax return.
You accepted a strong offer on your Bethesda home, the closing is scheduled, and then your settlement company sends over a number that stops you cold: a chunk of your proceeds — often tens of thousands of dollars — is being held back and sent to the state of Maryland. If you now live in Virginia, DC, Florida, or anywhere outside Maryland, that is the Maryland nonresident withholding tax at work, and it surprises far more sellers than it should.
It is one of the most common closing-table shocks I see with out-of-state owners — former Montgomery County residents who moved away and kept the house, people who inherited a Bethesda or Potomac property, and investors selling a rental. The good news: it is not an extra tax, and with the right paperwork filed on time, you can shrink it or eliminate it entirely. Here is exactly how it works and what to do before you get to closing.
How the Maryland Nonresident Withholding Tax Works at Closing
Maryland requires the settlement company to withhold state income tax from any seller who is not a Maryland resident at the time of sale. "Nonresident" simply means your permanent home is outside Maryland — it has nothing to do with how long you owned the property or whether you used to live in it.
This catches a predictable set of sellers off guard, and it is worth checking whether you are one of them:
- Former Montgomery County residents who moved to Virginia, DC, or Florida and held onto the house
- Heirs selling an inherited Bethesda or Potomac home who never lived in Maryland themselves
- Landlords and investors selling a rental they own from out of state
- Co-owners on a deed where at least one owner is a nonresident — the withholding applies to that person's share of the proceeds, even if the other owner still lives in Maryland
If any of those describe you, plan for the withholding now rather than discovering it on the settlement statement. For 2026, the withholding rates are:
- 8.75% for individuals, estates, and trusts
- 8.25% for business entities such as LLCs, corporations, and partnerships
The detail most articles get wrong is what those percentages apply to. The withholding is calculated on your "total payment" — the net proceeds actually paid to you — not the gross sale price and not your profit. Total payment is the sale price minus your mortgage payoff and the selling expenses disclosed on the settlement statement (commissions, transfer and recordation taxes, and settlement fees). It is still a large number, and it is usually far more than the tax you will actually owe.
That gap between what is withheld and what you owe is the source of the frustration. Maryland is holding a percentage of your equity as a prepayment, and you get the difference back later — but "later" can mean months.
What Actually Gets Withheld — A Bethesda Example
Numbers make this concrete. Say you moved to Northern Virginia a few years ago and are selling your Bethesda home for $1,200,000. You still owe $400,000 on the mortgage, and your selling costs — agent commissions, Maryland and Montgomery County transfer and recordation taxes, and settlement fees — come to roughly $90,000.
Your total payment (net proceeds) is about $710,000. At the 8.75% individual rate, the settlement company withholds about $62,125 and sends it to the Comptroller at closing.
Here is the catch: if you originally bought the home for $900,000, your actual taxable gain is far smaller than $710,000 — and if the home qualifies for the federal primary-residence exclusion, much of that gain may not be taxable at all. So you could have $62,000 withheld while owing Maryland only a fraction of it. That money is not lost, but it is tied up until you reconcile it. Understanding this early is part of calculating your true net proceeds on a Bethesda home sale before you ever sign a listing agreement.
How to Reduce or Avoid the Maryland Nonresident Withholding Tax
You are not stuck accepting the full withholding. Maryland gives nonresident sellers a way to apply for a full or partial exemption before closing using Form MW506AE, the Application for Certificate of Full or Partial Exemption.
The two most common paths:
- Withhold on the gain, not the net proceeds. A partial exemption recalculates the withholding based on your actual taxable gain — sale price minus your adjusted basis — which is almost always dramatically lower than your total payment.
- Claim the principal-residence exclusion. If the property was your main home and you lived in it for at least two of the last five years, your gain may be fully excluded under federal rules. In that case you can apply for a full exemption and have nothing withheld.
There is one deadline that matters more than any other: Form MW506AE must be received by the Comptroller at least 21 days before your closing date. Not postmarked — received. Miss that window and you lose the option to reduce the withholding at settlement, full stop. This is why residency needs to come up the moment you decide to sell, not the week before closing.
If you are also weighing the federal side of a sale, it is worth reviewing how the capital gains exclusion on a Bethesda home sale interacts with your basis — the same numbers drive both your federal return and your Maryland exemption request.
What Happens After Closing
Whatever Maryland withholds is credited against your actual Maryland tax liability — it is a prepayment, not a penalty. To get the difference back, you file a Maryland nonresident income tax return (Form 505) for the year of the sale, and Maryland refunds anything withheld above what you truly owed.
The practical takeaway: if you do nothing before closing, you can still recover your money, but you finance the state's cushion for months while you wait on a refund. If you file the MW506AE on time, you keep that cash in your pocket from day one. For most sellers, that is thousands of dollars in timing alone — which is why this belongs in the same early conversation as your closing costs when selling a Bethesda home.
Every situation is different — your basis, your residency history, and whether the home was ever your primary residence all change the math. This is exactly the kind of detail I flag for out-of-state sellers before we list, so there are no surprises when the settlement statement lands.
If you are selling a Bethesda or Montgomery County home from out of state and want to know what you will actually net after the withholding, I am happy to walk you through the numbers and connect you with a settlement company that handles the MW506AE correctly. Reach out anytime.
About Pey Behin
Pey Behin is a residential real estate agent serving the Washington, DC metro area, with a focus on Bethesda, Montgomery County, and Northern Virginia. He works with buyers and sellers who want clear strategy, data-driven pricing, and direct guidance throughout the transaction process.
This article is general information, not tax or legal advice. Confirm your specific situation with a Maryland tax professional or the Comptroller of Maryland before closing.