The State Withholding Surprise at Closing

In a growing list of states, the buyer or settlement agent must hold back a slice of your sale price and send it to the state revenue department at closing. A 1031 exchange usually earns an exemption, but only if the right affidavit is signed, and in some states only if it was filed weeks before closing. Miss the form and the money leaves escrow, your intermediary receives less, and you spend a year getting it back. Here are six states’ rules, from their own forms, and the one fact that changes every answer: boot. The state-by-state detail lives in our closing hub.

Why the number on the settlement statement is not your tax

Withholding is a prepayment, credited against the tax you later report on that state’s return. It is not the tax itself. But in an exchange the timing is the problem. Money withheld at closing never reaches the qualified intermediary, so it cannot be reinvested, and cash you do not reinvest is boot. The exemption forms exist so that an exchange can be completed with the full proceeds.

Six states, six paper trails

California. Revenue and Taxation Code section 18662(e) requires the buyer to withhold “3 1/3 percent of the sales price” (or, at the seller’s election, tax on the gain) on sales over $100,000. The exemption applies where the property “is being exchanged … for property of like kind, within the meaning of Section 1031,” but “only to the extent of the amount of the gain not required to be recognized.” The certification is made on Form 593; see our Form 593 line-by-line page.

Maryland. The 2026 Form MW506NRS sets withholding on a nonresident seller’s share of the total payment at 8.75 percent for an individual, estate or trust and 8.25 percent for a business entity. To avoid it, the 2026 Form MW506AE application “MUST BE RECEIVED no later than 21 days before closing date,” with the box for a “Tax-Free Exchange” for purposes of section 1031 checked and a letter signed by the qualified intermediary describing the exchange. The Comptroller then issues a certificate you present at settlement. Details at Maryland MW506AE for an exchange.

Hawaii. Under HARPTA the buyer withholds 7.25 percent of the amount realized from a nonresident seller and pays it to the Department by the 20th day after the transfer (Tax Facts 2010-1, revised April 2025). Form N-289 exempts a seller who certifies that, “by reason of a nonrecognition provision of the IRC,” no gain or loss must be recognized, with a description of the transfer and a summary of the law; the publication names the section 1031 exchange as the most common such provision. A withholding certificate on Form N-288B must be filed “at least 10 working days prior to the date of transfer.” See Hawaii HARPTA and Form N-289.

South Carolina. The buyer withholds on a nonresident seller’s gain (or on the amount realized if no affidavit of gain is given), at 5 percent for a corporation and otherwise at the state’s top individual rate, and remits on Form I-290 “by the 15th day of the month following the month of the sale.” The seller’s affidavit, Form I-295, has a like-kind exchange section: a simultaneous exchange deferring the entire gain, a deferred exchange through a qualified intermediary, or partial recognition with the recognized gain entered.

New York. Nonresident individuals, estates and trusts must estimate the tax on their gain on Form IT-2663 before the deed is recorded; the 2026 instructions tell recording officers not to record a deed unless each nonresident transferor has signed Form TP-584 Schedule D or presents Form IT-2663. Where “no gain or loss is recognized” under section 1031, the seller marks the exemption box (box 4B), summarizes the exchange and files no estimated payment.

New Jersey. On Form GIT/REP-3, box 7a certifies that the gain “is not recognized for federal income tax purposes under 26 U.S. Code section 721, 1031, or 1033,” and box 7b that the seller “only received like-kind property.” The instructions say that if non-like-kind property is received the seller may instead file GIT/REP-1 and remit 2 percent of the nonexempt amount at recording, and that if a deferred exchange is later voided the qualified intermediary must file GIT/REP-1 and remit 2 percent of the total consideration.

Boot changes the answer

Every one of these exemptions is written for a full exchange. Take cash, keep a note, or carry less debt on the replacement, and some gain is recognized, and the forms respond differently. California withholds on the recognized portion. New Jersey asks for 2 percent of the nonexempt amount. Hawaii is the strictest: “If any amount of gain is recognized in an IRC section 1031 exchange, Form N-289 cannot be used to obtain an exemption from the withholding.”

A hypothetical shows the cost. You sell a Hawaii rental for $1,000,000 as a nonresident and plan to take $50,000 of cash at closing. Because gain is recognized, the N-289 is unavailable and the buyer withholds 7.25 percent of the full amount realized, $72,500, not 7.25 percent of the $50,000. Your intermediary receives $877,500 instead of $950,000, and the extra $22,500 that never reached the exchange is itself boot unless you add cash. The way around it is the N-288B withholding certificate, filed at least ten working days before closing, or a decision to take no cash at closing at all; our page on cash out DSTs versus taking boot covers that choice. Run your own numbers with your CPA.

Deadlines that fall before closing

Two of the six require action before the closing date: Maryland’s 21-day receipt rule for the exemption application, and Hawaii’s 10-working-day rule for a withholding certificate. New York’s and New Jersey’s forms are presented at recording, so they must be complete at the closing table. California’s and South Carolina’s are completed in escrow. Our page on exemption filing deadlines by state lists every state with a pre-closing requirement, and which states withhold at closing covers the rest.

What to do now

1. The week your sale contract is signed, ask the settlement agent which state withholding form applies and whether an exemption must be filed before closing.
2. Decide now whether you will take any cash at closing. If yes, read the state’s rule on partial exchanges before you count on an exemption.
3. Give your qualified intermediary the state form early; Maryland, for one, wants the intermediary’s letter with the application.
4. Keep the stamped form with your Form 8824 file; it is the proof that the proceeds reached the exchange intact. Start your exchange plan with the state form on the checklist.

Sources

• California Revenue and Taxation Code section 18662
• Comptroller of Maryland, Form MW506NRS (2026)
• Comptroller of Maryland, Form MW506AE (2026)
• Hawaii Department of Taxation, Tax Facts 2010-1, Understanding HARPTA (revised April 2025)
• South Carolina Department of Revenue, Form I-290
• South Carolina Department of Revenue, Form I-295
• New York State Department of Taxation and Finance, Instructions for Form IT-2663 (2026)
• New Jersey Division of Taxation, Form GIT/REP-3