Got PCS Orders? Here's What Military Families Need to Know Before Selling Their Maryland Home
- Kat Moore — The German Realtor®
- May 26
- 5 min read
By Kat Moore, The German Realtor® | May 2026 | 5 min read
Note: This article is for general informational purposes only. The interaction between federal military tax law and Maryland's withholding process is complex — always consult a military-savvy tax attorney or CPA for advice specific to your situation.
You got PCS orders. You rented out your Maryland home for three years while stationed elsewhere. Now you're ready to sell, and your settlement company just told you the state wants to withhold thousands of dollars from your proceeds at closing. Is that right? Do you actually owe it?
The short answer is: probably not. But you have to know the rules, and you have to act before closing day. I put this guide together specifically for the military families I work with in the Maryland market, because this issue comes up constantly and catches people completely off guard.
Let's walk through it.
What Is the Maryland Non-Resident Withholding Tax?
Since 2003, Maryland has required title companies to withhold income tax from the sale proceeds of any nonresident selling Maryland real estate. The law was passed specifically because nonresidents were selling Maryland property and never reporting the gain on a Maryland tax return, and the state was losing out on significant tax revenue as a result.
The withholding happens right at the closing table; the title company takes it out and sends it to the state before you ever see it.
The current rates are 8.75% for individuals, estates, and trusts, and 8.25% for business entities. Here's the part that shocks people: those rates apply to the total sale price, not your actual profit.
⚠ Real Numbers: On a $400,000 sale, Maryland could withhold up to $35,000 at closing. Yes, you'd get excess money back when you file your Maryland return, but that could mean waiting months for a large refund. The goal is to get an exemption upfront so the withholding never happens.
The Classic Military Scenario
Here's the situation I see most often: a servicemember gets stationed in Maryland, buys a home, lives in it for a few years, then receives PCS orders to another state. Rather than sell immediately, they rent the house out and eventually sell it years later, by which point they're a non-resident of Maryland.
The question is: does the Maryland nonresident withholding apply? And the answer depends entirely on two things:
The Two Key Questions:
1. Does the home qualify as your principal residence under federal law (IRC §121)?
2. If not under the standard rule, does the military suspension election bring you back into eligibility?
The 2-of-5-Year Rule — And Why It Matters
Maryland follows the federal principal residence exclusion under IRC §121. If you lived in the home as your primary residence for at least 2 of the last 5 years before the sale, the property qualifies for a full exemption — even if you're now a nonresident.
Here's how a typical military timeline plays out:
• Year 1–3: Living in a Maryland home as primary residence
• Year 4–6: PCS orders-renting the home from another state
• Year 6: Sell the home
Notice the problem? The sale happens in Year 6 — one year outside the standard 5-year window. Under the basic rule alone, you wouldn't qualify. But this is exactly where the military gets a break that most people don't know about.
"The military suspension election was designed for exactly this situation — and it can save you tens of thousands of dollars at closing."
The Military Suspension Election (IRC §121(d)(9))
Under IRC §121(d)(9), active-duty service members can elect to suspend the running of the 5-year clock during periods of qualifying military service — for up to 10 years. In plain English: the years you spent away on PCS orders don't count against you.
So in the example above, if you make this election, the 3 years you spent renting the home while stationed elsewhere are essentially frozen. Your 3 years of living there still count as 3 of the last 5 years — and you qualify for a full exemption.
✓ Bottom Line: Lived in your Maryland home for 2+ years before PCS orders? You almost certainly qualify for a full exemption from nonresident withholding. But you have to apply for it — it doesn't happen automatically.
How to Apply: Form MW506AE
The exemption doesn't kick in on its own. You need to file Form MW506AE, the Application for Certificate of Full or Partial Exemption, with the Maryland Comptroller's office. Military sellers should check the "Principal Residence – Active-Duty Military" box.
1. Start immediately once your home goes under contract. Do not wait.
2. Complete Form MW506AE and check the Active-Duty Military principal residence box.
3. Attach your PCS orders and proof of prior Maryland residency-tax returns showing a Maryland address, utility bills, or property tax statements all work.
4. Submit at least 21 days before closing. The Comptroller cannot process applications received after that deadline.
5. Get the Certificate to your title company before closing day. No certificate, no exemption-the withholding will happen regardless.
One More Thing: Your Rental Returns
Here's a wrinkle that catches people off guard. During the years you rented the home out, you were earning rental income from Maryland property. Maryland requires nonresident landlords to file Form 505 (the Maryland Nonresident Income Tax Return) every year, even if the rental ran at a net loss.
⚠ Don't Skip This: If you didn't file those annual returns, the Comptroller may reject your exemption application because the state has no record of the rental activity. Before you submit your MW506AE, make sure your Form 505 filings are current. If they're not, talk to a tax professional about catching up first.
Quick Reference: Know Where You Stand
Situation | Withholding | Notes |
Nonresident; never lived in the home | Yes | No principal residence exemption available |
Lived there 2+ of last 5 yrs; selling in window | No — exempt | Standard IRC §121 exemption applies |
Military: lived 2+ yrs, rented on PCS, then sold | No — exempt | IRC §121(d)(9) suspension; file MW506AE |
Military: bought as investment, never lived in it | Yes | No principal residence basis; partial exemption may apply |
The Bottom Line
The Maryland nonresident withholding tax can feel like a gut punch when you find out about it at the closing table. But for most military families who lived in their Maryland home before a PCS move, there's a clear path to a full exemption — you just need to know it exists and file the right paperwork in time.
That's why having a Realtor who understands the military lifestyle isn't just a nice-to-have. It can literally save you tens of thousands of dollars.
The framework described here is real and well-established in federal law — but how it applies to your specific circumstances requires professional review before you file anything. If you're preparing to sell your Maryland home and you're not sure where you stand, reach out. I'm happy to walk through your specific situation with you and connect you with a military-savvy tax attorney or CPA who knows this area inside and out.
Let's Talk Before You List
Whether you're on active duty, recently separated, or planning ahead — I'm here to help you navigate every step of the process.
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The Kat Walk To Homeownership
Want to dig deeper? Here are the official sources:
"Maryland Tax-General Article §10-912" to: https://mgaleg.maryland.gov/mgawebsite/Laws/StatuteText?article=gtg§ion=10-912&enactments=false
"IRC §121(d)(9)" to: https://www.law.cornell.edu/cfr/text/26/1.121-5
"Form MW506AE" to: https://www.marylandcomptroller.gov/content/dam/mdcomp/tax/forms/2026/mw506ae.pdf
Maryland Comptroller's office" to: https://www.marylandtaxes.gov
Form 505 (2025 tax year, filed in 2026):
This article is provided for general informational purposes only and does not constitute legal, tax, or financial advice. The interaction between federal military tax provisions — including IRC §121(d)(9) — and Maryland's nonresident withholding exemption process is complex and not black-and-white in every case. Individual circumstances vary significantly. Before filing Form MW506AE or making any tax decisions, consult a qualified tax attorney or CPA with experience in military tax matters. Maryland Comptroller forms: marylandcomptroller.gov.
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