Maine Form REW-5: Requesting a Withholding Exemption for a 1031 Exchange

Maine's 2.5% is withheld by the buyer unless a certificate says otherwise

Section 5250-A puts the duty on the buyer: withhold 2.5% of the consideration from any seller who is not a Maine resident on the date of transfer, and transmit it to the State Tax Assessor within 30 days. In practice the title company or closing attorney remits for the buyer on Form REW-1-1040 for individual sellers, REW-1-1041 for estates and trusts, or REW-1-1120 for corporations, and since 2025 those forms and payments must go through the Maine Tax Portal.

Maine Revenue Services describes the withholding as an estimated payment of income tax rather than a tax, similar to payroll withholding, and the seller claims it on the Maine return for the year of sale. A resident seller escapes it by giving the buyer a residency affidavit, Form REW-2 for individuals or REW-3 for entities; a Maine resident who fails to provide one is treated as a nonresident. The buyer is told of the requirement on Form REW-4.

Three exceptions matter to investors. Nothing is withheld when the consideration is less than $100,000, nothing is withheld on a foreclosure sale where the price does not exceed the secured debt, and nothing is withheld when the seller or buyer has received from the State Tax Assessor a certificate stating that no tax is due. That certificate is the exchange route.

Form REW-5 asks for the basis, the sale and the exchange contract, five business days ahead

Form REW-5 is a two-page application. Lines 4 and 5 record the acquisition date and method, and the method list includes like-kind exchange, in which case line 6 takes the basis reported on federal Form 8824 for the earlier exchange. Lines 6 through 15 then build adjusted basis, amount realized and the estimated gain subject to federal and Maine tax, and line 16 asks how the sale will be reported federally: gain, loss, exclusion, installment sale or like-kind exchange.

For an exchange, the Revenue Services FAQ states that a copy of the section 1031 like-kind exchange contract must accompany the REW-5. The certificate may be issued when no tax is due on the gain from the transfer, and a deferred exchange that is fully documented at the time of the request meets that test; the instructions ask for supporting documents such as the settlement statement from the original purchase and a list of capital improvements.

Timing is the trap. The form says it must be submitted at least five business days before the closing date, the July 2026 notification repeats that every request must be completed and granted before closing with at least five business days for processing, and the instructions add that MRS will not issue a withholding certificate after the sale has closed. Mailed forms need an additional two to three weeks, and MRS Rule 104 now requires REW-5 to be filed electronically on the Maine Tax Portal absent a hardship waiver. File it the week the purchase and sale agreement is signed, not the week of closing.

What the closer does with the certificate at the table

Once the certificate issues, the buyer is relieved of withholding under section 5250-A and the REW-1 is not filed for that seller. If the certificate reduces rather than eliminates withholding, the closer completes REW-1 line 8b, enters the certificate number and withholds the reduced amount. Each seller receiving proceeds needs a separate REW-1 and therefore a separate REW-5; married sellers filing jointly may file one.

Give the closing agent the certificate number as soon as it arrives, and give the qualified intermediary a copy, since the proceeds assigned to the intermediary should be the full consideration less costs. Without the certificate the agent must withhold 2.5% of the price even if the exchange agreement is in the file, because the statute gives the buyer no discretion; the general rules on state withholding at closing explain why money that reaches a state agency cannot be returned to the exchange.

A nonresident seller who misses the window is not without remedy, only without a timely one. The withholding is credited on the Maine nonresident return, with any excess refunded, and the return must be filed within three years to recover it.

Boot and partial exchanges get a reduction, measured by gain times the top rate

Section 5250-A lets the Assessor reduce withholding to the seller's maximum Maine tax on the gain, and the REW-5 instructions describe the second ground for a certificate: the 2.5% amount exceeds the seller's maximum Maine income tax liability, which equals the capital gain multiplied by the seller's highest rate. The 2025 form prints 7.15% for individuals and 8.93% for C corporations; for 2026 the individual rate schedule still tops out at 7.15%, with a 2% surcharge only on Maine taxable income above $1,000,000 single or $1,500,000 joint.

Hypothetical: a Massachusetts resident sells a Portland fourplex for $600,000, assigns $560,000 to the intermediary and keeps $40,000 of cash boot. Full 2.5% withholding would be $15,000. A REW-5 showing $40,000 of recognized gain on line 15 and the exchange contract attached supports a certificate reducing withholding to $2,860, which is 7.15% of $40,000, and the closer remits that on REW-1 within 30 days. Run your own numbers with your CPA, because depreciation recapture is part of the gain Maine taxes.

If the exchange later fails, the certificate was issued on the facts presented and is not revisited; the recognized gain is reported on the Maine nonresident return for the year it is recognized and the tax paid then, with the usual choices after a failed exchange on the federal side.

After closing: no tracking form, and the transfer tax is a separate declaration

Maine does not require an annual report of deferred gain after an exchange into out-of-state property, so a successful exchange from Maine into a Delaware Statutory Trust holding property elsewhere creates no continuing Maine filing. The real estate transfer tax declaration filed with the deed is separate from withholding and has no exchange exemption; its rate is on the state page.

Keep the certificate, the REW-5 as filed, the exchange contract and the closing statement together. If Revenue Services later questions the nonresident return, those documents show why nothing was withheld, and the post-exchange checklist covers the federal records that sit beside them.