Capital Gains on Selling a House in Maryland (Part 14 of 30: The Prince George's County Answer Guide)
This is Part 14 of The Prince George's County Answer Guide from Donnell Williams Jr. and DMV Prime Properties, a 30-part series answering the questions buyers, sellers, and people relocating are actually searching about Prince George's County, Maryland.
How do capital gains on selling a house in Maryland work? Most homeowners selling a main home can exclude up to $250,000 of gain ($500,000 for married couples filing jointly) from federal tax if they meet IRS ownership and use tests. Maryland generally follows federal adjusted gross income, so excluded gain is usually not taxed by Maryland either. Gain above the exclusion is taxed as income.
The details matter when you have owned the home a short time, rented it out, or have a large gain. This post explains the rules so you can have a better conversation with your CPA.
Key Takeaways
- IRS Publication 523 allows up to $250,000 of gain on a main home to be excluded ($500,000 for most married couples filing jointly).
- To qualify, you generally must have owned and lived in the home for at least 2 of the 5 years before the sale.
- Maryland taxes capital gains as part of regular income. Prince George's County adds a 3.20% local income tax for 2026, per the Maryland Department of Legislative Services.
- For tax years beginning after December 31, 2024, Maryland added a 2% tax on net capital gain for individuals with federal adjusted gross income over $350,000.
- A primary residence sold for less than $1,500,000 is excluded from that 2% tax, according to Comptroller Technical Bulletin 58.
How Are Capital Gains on Selling a House in Maryland Calculated?
Capital gain is the profit on a sale for tax purposes. It is not the same as the cash you receive at settlement. IRS Publication 523 uses three terms:
- Amount realized: the sale price minus selling expenses, such as brokerage compensation and certain closing costs.
- Adjusted basis: generally what you paid for the home, plus certain purchase costs and the cost of improvements, minus certain items such as depreciation if you used part of the home for business or rental.
- Gain: amount realized minus adjusted basis.
A simple example
Suppose a Bowie homeowner bought for $280,000 in 2015, added a $40,000 kitchen and roof, and sells in 2026 for $475,000 with $30,000 in selling expenses. All numbers are hypothetical.
Mortgage payoff does not reduce your gain. A seller can owe little cash at settlement and still have a large gain, or receive a large check and owe no tax.
Receipts for improvements such as a new roof, HVAC system, or addition can add to basis. Routine repairs generally do not.
Who Qualifies for the Federal Home Sale Exclusion?
The exclusion is in Section 121 of the Internal Revenue Code, and IRS Publication 523 (2025) explains it. You generally qualify for the full exclusion if:
- Ownership test: you owned the home for at least 24 months during the 5 years before the sale.
- Residence test: you lived in it as your main home for at least 24 months (730 days) during those 5 years. The time does not have to be continuous.
- Look-back test: you did not exclude gain on another home sale in the 2 years before this sale.
For a married couple filing jointly to claim $500,000, only one spouse must meet the ownership test, but both must meet the residence test, according to Publication 523.
What if you do not meet the 2-year rule?
Publication 523 allows a partial exclusion when the main reason for the sale was a work change, a health issue, or certain unforeseeable events. Examples include a new job at least 50 miles farther from the home, a health-related move, divorce, or job loss. The partial amount is generally prorated based on how much of the 2-year period you met.
This matters in Prince George's County in 2026. Federal workers make up more than 9% of the county's workforce, according to The Diamondback (November 19, 2025). An owner who relocates for a new job within two years of buying should ask a CPA whether a partial exclusion applies.
When the exclusion may be limited
- Rental or business use. Depreciation claimed after May 6, 1997 generally cannot be excluded, and periods of nonqualified use can reduce the exclusion, per Publication 523.
- Investment property. A home you never lived in does not qualify. Investors and flippers are taxed differently.
- Inherited property. Basis rules for inherited homes differ. Part 18 of this series covers selling an inherited house in Prince George's County.
How Does Maryland Tax Capital Gains on a Home Sale?
Maryland does not have a separate capital gains rate for most taxpayers. Maryland income tax starts with federal adjusted gross income, so gain that is excluded federally under Section 121 is generally not included for Maryland. Taxable gain is added to your Maryland income and taxed at regular state rates plus the local rate.
State and local rates
The Comptroller of Maryland reports that, for tax years beginning after December 31, 2024, Maryland added a 6.25% bracket and a 6.50% bracket for higher incomes. For single filers, the 6.50% rate applies over $1,000,000. For joint filers, it applies over $1,200,000.
Local income tax applies on top of the state rate. According to the Maryland Department of Legislative Services 2026 county tax rate guide, Prince George's County's local income tax rate is 3.20% for 2026.
The new 2% tax on net capital gain
The Budget Reconciliation and Financing Act of 2025 added an additional 2% tax on net capital gain for individuals with federal adjusted gross income over $350,000, according to the Comptroller's 2025 legislative session tax alert. It applies to tax years beginning after December 31, 2024.
Comptroller Technical Bulletin 58 (December 29, 2025) lists gains excluded from the 2% tax. One exclusion covers a primary residence: the dwelling must be the taxpayer's primary residence, must be a qualifying residential property type such as a single-family home, townhome, or condominium unit, and must have sold for less than $1,500,000. Gains on certain retirement accounts and some other assets are also excluded.
Most Prince George's County homes fall well below the $1,500,000 threshold. The PGCAR April 2026 Market Watch reported a $450,000 median sold price. Sellers of a second home, rental, or investment property should not assume the residence exclusion applies.
What If You Sell and Move Out of Maryland?
Sellers who are not Maryland residents at settlement face withholding on the sale. The Comptroller reports that, for sales after June 30, 2025, the rate is 8.75% of the total payment for nonresident individuals and 8.25% for nonresident entities. A former owner whose home was a principal residence for 2 of the last 5 years may be able to certify an exemption. Part 15 of this series covers selling a house in Maryland and moving out of state.
Planning Before You List
Tax planning is easier before a contract is signed. A few steps help:
- List improvements with receipts. Additions, roofs, windows, systems, and major remodels.
- Check your dates. Know your purchase date, move-in date, and any months the home was rented.
- Ask about timing. If you are close to the 2-year mark, a CPA may suggest a settlement date that changes the result.
- Estimate your net first. A seller net sheet shows proceeds, and your CPA can estimate tax on the gain (see Part 12 of this series on how much it costs to sell a house in Maryland).
Donnell has worked in Prince George's County real estate since 2000, starting at Asset Realty, and also flips properties. He has seen both sides of the tax question: owner-occupants who qualify for the exclusion and investors who do not. Donnell is a Broker-Owner licensed in Maryland, DC, and Virginia, and his approach is to explain how the rules work, then send clients to a CPA for their numbers. DMV Prime Properties follows the same "Educate to Elevate" philosophy on every listing.
This article is general information, not legal, tax, or lending advice. Tax rules change, and your situation may differ. Consult a CPA or tax attorney before you sell.
Frequently Asked Questions
Do I pay capital gains tax when I sell my house in Maryland?
Many owners do not, if their gain is within the federal exclusion and they meet the ownership and use tests. Gain above the exclusion is taxed federally and is included in Maryland income. A CPA can confirm your result.
How long do I have to live in my house to avoid capital gains in Maryland?
Under IRS Publication 523, you generally must own and live in the home for at least 24 months in the 5 years before the sale. Maryland generally follows the federal result. A partial exclusion may apply for certain job, health, or unforeseeable moves.
Does Maryland have a capital gains tax on home sales?
Maryland taxes capital gains as regular income rather than at a separate rate. Since 2025 tax years, individuals with federal adjusted gross income over $350,000 also owe an additional 2% on net capital gain. A primary residence sold for under $1,500,000 is excluded from that 2%.
What is Maryland's 2% capital gains tax?
It is an additional state tax on net capital gain for individuals with federal adjusted gross income over $350,000, created by the Budget Reconciliation and Financing Act of 2025. Comptroller Technical Bulletin 58 lists exclusions, including qualifying primary residences sold for less than $1,500,000.
Can I reduce my capital gain on a home sale?
Selling expenses and documented improvements can reduce gain under IRS rules. Routine repairs generally do not count. Keep receipts and ask a CPA which costs qualify.
Next Steps
If you are thinking about selling, start with a free home valuation and a seller net sheet from Donnell Williams Jr. and DMV Prime Properties. Donnell will estimate your sale price and proceeds so you can bring real numbers to your CPA before you list. DMV Prime Properties is headquartered at 12815 Old Fort Road, Suite 105, Fort Washington, MD 20744. Call 301.265.3446, email donnell@dmvprimerealty.com, or visit OWNDMV.COM to schedule.
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