1031 Exchange in Maine: REW Withholding, Transfer Tax Tiers and DSTs

Maine's REW: the buyer must hold back 2.5% of a nonresident's price unless REW-5 clears the exchange

Maine requires every buyer of Maine real property to withhold 2.5% of the total consideration from a nonresident seller whenever the price is $100,000 or more (the threshold rose from $50,000 for closings on or after January 1, 2021). "Nonresident seller" is broad: it includes any nonresident individual, estate or business, and a Maine resident who fails to give the buyer or escrow agent a signed residency affidavit on Form REW-2 or REW-3.

Maine Revenue Services says plainly that REW "is required, even in a like-kind exchange." The way out is Form REW-5, a request for exemption or reduction, filed with a copy of the §1031 exchange contract; MRS asks for it at least five business days before closing and warns that late requests may be denied. File it as soon as the purchase agreement is signed.

If the money is withheld anyway, the buyer remits it with Form REW-1-1040 (REW-1-1041 for trusts and estates, REW-1-1120 for corporations) within 30 days of closing through the Maine Tax Portal, and the seller recovers it only by filing a Maine income tax return for that year. Since withheld cash never reaches the qualified intermediary, a missed REW-5 can leave an exchange short of the funds needed to buy replacement property.

Maine's new 2% surcharge lifts the top rate to 9.15%, and capital gains are ordinary income

For tax years beginning in 2026, Maine taxes single filers at 5.8% on taxable income below $27,400, 6.75% from $27,400 to $64,850 and 7.15% above; joint filers reach 7.15% at $129,750. There is no capital-gains rate or exclusion, so the entire gain on a Portland triple-decker or a Bar Harbor rental is taxed at whatever bracket it lands in.

Starting with tax year 2026, MRS adds a surcharge of 2% on the portion of Maine taxable income above $1,000,000 for single filers, $750,000 for married filing separately, and $1,500,000 for joint and head-of-household filers, with the thresholds inflation-adjusted from 2027. A resident who sells a large multifamily portfolio outright in a single year can be pushed over that line by the gain alone; the same sale inside an exchange keeps the gain out of Maine taxable income entirely.

Maine's income tax follows the Internal Revenue Code as amended through December 31, 2024 (36 M.R.S. §111), and MRS's own REW guidance states that a gain deferred for federal purposes under a qualifying like-kind exchange is also deferred for Maine income tax purposes. The federal rules are summarized in what is a 1031 exchange.

Maine's transfer tax added a higher tier above $1 million on November 1, 2025, and the seller pays half

Maine's real estate transfer tax is $2.20 for each $500 of value, imposed half on the grantor and half on the grantee and collected by the register of deeds when the deed is recorded. For transfers on or after November 1, 2025, 36 M.R.S. §4641-A adds $3.80 per $500 on the portion of value above $1,000,000, so that slice is taxed at $6.00 per $500, or 1.2%.

On a $3 million sale the combined tax rises from $13,200 to $28,400, split between the parties. An exchange does not change any of it: the seller's half comes out of the closing statement like any other cost of sale, and a Maine buyer completing an exchange pays the grantee's half. Transfers of a controlling interest in an entity that owns Maine real estate are taxed the same way under the controlling-interest transfer tax, and every deed needs a transfer tax declaration showing the municipality's adjusted assessed value.

Tree Growth and Farmland parcels carry withdrawal penalties that a sale can set off

Maine's current-use programs tax land on its use rather than its market value: Tree Growth for at least ten forested acres under a management plan, Farmland for five or more acres producing at least $2,000 a year, plus Open Space and Working Waterfront. Leaving a program costs money. The Tree Growth penalty is the greater of five years of back taxes with interest or 20% to 30% of the difference between the Tree Growth value and fair market value; the Farmland penalty is five years of tax difference plus interest.

A sale does not end the classification by itself, but it starts a clock. The new owner of Tree Growth land must file within one year a sworn statement that a management plan is in place or a forester's statement that the prior plan is being followed, cannot commercially harvest until that is done, and faces $500 administrative penalties and eventual withdrawal if it is not. Selling off a piece that leaves the remainder under ten forested acres forces withdrawal, and MRS Bulletin 19 assigns that penalty to the seller.

An investor exchanging out of classified woodland or farmland into a DST should settle who bears any withdrawal penalty in the purchase agreement and confirm with the town assessor that the buyer intends to keep the land enrolled.

Maine honors the federal deferral and has no claw-back on out-of-state replacements

Maine has no rule that tracks gain deferred on Maine property into another state. A Kennebunk landlord who exchanges into a DST holding apartments in the Carolinas is taxed by Maine on the DST income as a resident, with a credit for taxes paid to the states where the buildings sit, but Maine never comes back for the original Kennebunk gain when the DST interest is sold.

Nonresident sellers who complete the exchange and clear REW with Form REW-5 owe Maine nothing on the sale. If REW was withheld because the REW-5 was late, the refund claim must be made on a Maine return within three years of the return's due date or the payment date, whichever is later.