Minnesota capital gains tax on real estate is among the highest in the country: gains are taxed as ordinary income at up to 9.85%, and since 2024 Minnesota adds its own 1% tax on net investment income above $1 million. On a large sale, the state share can rival the federal capital gains rate, which makes a Minnesota 1031 exchange unusually valuable. The exchange defers both state taxes and the federal tax, but not the 0.33% deed tax due when the deed is recorded.
Reviewed by Jon Hilley, CEO & Founder of 1031 Specialists. Last reviewed September 29, 2026.
| State tax on real estate gains | Ordinary rates of 5.35% to 9.85%; 9.85% above $337,930 joint or $203,150 single taxable income (2026) |
|---|---|
| Long-term capital gains treatment | No exclusion or lower rate; plus 1% net investment income tax on net investment income over $1 million |
| Nonresident withholding at closing | None for individual sellers |
| Withholding form | None required at closing |
| Transfer or conveyance tax (a 1031 does not defer it) | Deed tax of 0.33% of net consideration; 0.34% in Hennepin and Ramsey counties |
| Clawback on out-of-state replacement property | No |
| Conforms to Section 1031 | Yes |
| Estate tax | Minnesota estate tax with a $3 million exemption |
Table of contents
- How much is capital gains tax on real estate in Minnesota?
- Minnesota tax on a $300,000 gain: worked example
- Minnesota’s 1% net investment income tax
- Minnesota nonresident withholding: none at closing
- Minnesota deed tax: what a 1031 does not defer
- Minnesota estate tax and holding exchanged property
- Minnesota conformity and clawback rules
- Moving into or out of Minnesota
- Where 1031 exchanges happen in Minnesota
- Federal 1031 rules in brief
- Common Minnesota 1031 exchange mistakes
- Start your Minnesota 1031 exchange
- Frequently asked questions
- Sources
How much is capital gains tax on real estate in Minnesota?
Minnesota does not give long-term capital gains any break. The gain on your rental property, including the unrecaptured §1250 depreciation portion, is part of Minnesota taxable income and taxed at the regular rates. For 2026, the Department of Revenue’s brackets are:
| Rate | Single | Married filing jointly |
|---|---|---|
| 5.35% | Up to $33,310 | Up to $48,700 |
| 6.80% | $33,311 to $109,430 | $48,701 to $193,480 |
| 7.85% | $109,431 to $203,150 | $193,481 to $337,930 |
| 9.85% | $203,151 and over | $337,931 and over |
A sizable gain pushes almost any seller into the 9.85% bracket for most of it. There is no local income tax in Minnesota, but there is a second state layer on very large sales, covered below. Model the federal recapture piece with our depreciation recapture calculator.
Minnesota tax on a $300,000 gain: worked example
Assumptions: a $300,000 long-term gain on an investment property, $100,000 of it unrecaptured §1250 depreciation, a married couple filing jointly already in the top federal and top Minnesota brackets, with total net investment income under $1 million.
| Line | Math | Tax |
|---|---|---|
| Federal unrecaptured §1250 gain | 25% × $100,000 | $25,000 |
| Federal long-term capital gain | 20% × $200,000 | $40,000 |
| Net investment income tax | 3.8% × $300,000 | $11,400 |
| Federal subtotal | $76,400 | |
| Minnesota income tax | 9.85% × $300,000 | $29,550 |
| Total deferred by a full 1031 | $105,950 |
A full exchange keeps $105,950 invested, of which $29,550 is Minnesota tax. If the sale pushed your net investment income above $1 million, the 1% Minnesota net investment income tax would apply to the excess as well. See the capital gains vs. 1031 exchange comparison to test other numbers.
Minnesota’s 1% net investment income tax
The 2023 tax law created a Minnesota net investment income tax for tax years beginning after December 31, 2023. It is 1% of net investment income over $1 million and applies to individuals, estates and trusts. Net investment income follows the federal definition and includes capital gains and rental income, reduced by investment expenses. Gains on class 2a agricultural property in Minnesota are excluded.
For a seller of a $6 million apartment building with a $3 million gain, the extra layer is about $20,000 (1% of the $2 million above the threshold) on top of 9.85% income tax and federal tax. It is reported on Schedule NIIT with Form M1, and it cannot be paid through a composite return or pass-through entity tax election. Because it is computed on recognized gain, a 1031 exchange defers it too.
Minnesota nonresident withholding: none at closing
Minnesota does not require buyers or closers to withhold state income tax when an individual nonresident sells Minnesota real estate. The obligation remains: gain on Minnesota real property is Minnesota-source income, and a nonresident who sells without an exchange files a Minnesota return and pays tax on it at Minnesota rates. Foreign sellers still face federal FIRPTA withholding; see foreigners selling US property.
Minnesota deed tax: what a 1031 does not defer
Minnesota’s deed tax is 0.33% of the net consideration, due when the deed is presented for recording. Hennepin and Ramsey counties add a 0.01% Environmental Response Fund tax, for 0.34%. On a $200,000 sale that is $660 in most counties and $680 in Minneapolis or Saint Paul; on a $2,500,000 sale in Hennepin County it is $8,500. By custom the seller pays the deed tax in most Minnesota transactions, though the purchase agreement controls.
Your replacement purchase may carry mortgage registry tax on a new Minnesota loan as well. A 1031 exchange defers neither tax; both are closing costs.
Minnesota estate tax and holding exchanged property
Minnesota is one of a handful of states with its own estate tax, with a $3 million exemption and rates from 13% to 16%. That matters to exchange planning because the classic strategy of exchanging until death, covered in our guide to swap till you drop, erases deferred income tax through the stepped-up basis but leaves the property in your estate. For a Minnesota investor with a large portfolio, the income tax you defer and the estate tax you may owe should be planned together, often with a Delaware statutory trust for easier division among heirs.
Minnesota conformity and clawback rules
Minnesota starts from federal adjusted gross income, so gain deferred under Section 1031 is deferred for Minnesota. There is no clawback: Minnesota does not require annual reporting after you exchange into property in another state, and it does not tax the deferred gain if you later sell that property as a nonresident. Boot is taxed at Minnesota rates in the year of the exchange.
Moving into or out of Minnesota
With rates near 10%, Minnesota is a common origin state for investors who exchange into a no-income-tax state and then retire there. Florida, South Dakota and Arizona are frequent destinations. Because there is no clawback, a later sale after you establish residence elsewhere is not taxed by Minnesota. Minnesota audits residency changes closely, so keep clear evidence of your new domicile before that sale. Investors along the St. Croix often trade into Wisconsin, which excludes 30% of long-term gains. If you move to Minnesota holding a replacement property from a clawback state such as California or Oregon, that state may still tax its deferred gain.
Where 1031 exchanges happen in Minnesota
Most exchanges start in the Twin Cities: multifamily in Minneapolis and first-ring suburbs, industrial along I-94 and I-35, and single-tenant net-lease retail across the metro. Rochester, anchored by Mayo Clinic, supports medical office and apartments. Duluth and the North Shore add hospitality and vacation rentals, and St. Cloud and Mankato offer smaller multifamily. Farmland across southern and western Minnesota trades through exchanges as well, often into larger farms or net-lease property.
Federal 1031 rules in brief
Identify replacement property in writing within 45 days of your sale and close within 180 days (or by your return due date with extensions, if earlier). A qualified intermediary must hold the proceeds from closing to closing. To defer all of the tax, buy replacement property of equal or greater value and replace the debt you pay off, with new debt or added cash. Our 1031 exchange guides cover the details, the 45-day identification validator checks your list, and the boot calculator shows what a partial exchange costs.
Common Minnesota 1031 exchange mistakes
- Underestimating the state tax. At 9.85%, Minnesota tax on a large gain is often a third of the total bill; a partial exchange with boot is costly here.
- Forgetting the 1% net investment income tax. A sale that crosses $1 million of net investment income adds a second state layer.
- Moving out on paper only. Selling the replacement property soon after a thin residency change invites a Minnesota residency audit.
- Leaving estate tax out of a swap-till-you-drop plan. The $3 million exemption is far below the federal one.
- Treating a lake cabin as investment property. Personal-use cabins do not qualify; see does my property qualify.
Start your Minnesota 1031 exchange
Open your exchange before the relinquished property closes. Start your exchange, book an intro call, or call (631) 438-1031, and we will coordinate with your closer so the proceeds come straight to us.
Frequently asked questions
How much is capital gains tax on real estate in Minnesota?
Minnesota taxes real estate gains as ordinary income at rates from 5.35% to 9.85%. For 2026 the 9.85% rate starts above $337,930 of taxable income for joint filers and $203,150 for single filers. A 1% net investment income tax applies to net investment income over $1 million.
How can I avoid capital gains tax on real estate in Minnesota?
A 1031 exchange defers Minnesota income tax, the 1% net investment income tax and federal tax on investment property when you reinvest all proceeds through a qualified intermediary within 45 and 180 days. Holding until death gives heirs a stepped-up basis, though Minnesota estate tax may apply above $3 million.
Does Minnesota withhold tax when a nonresident sells property?
No. Minnesota has no closing withholding for individual nonresident sellers, but gain on Minnesota property is Minnesota-source income and must be reported on a Minnesota return if taxable.
How much is the Minnesota deed tax, and does a 1031 defer it?
The deed tax is 0.33% of net consideration, or 0.34% in Hennepin and Ramsey counties. It is a recording cost, so a 1031 exchange does not defer it.
Does the Minnesota 1% net investment income tax apply to real estate gains?
Yes, when your net investment income exceeds $1 million. Capital gains on real estate count, except gains on class 2a agricultural property in Minnesota.
Does Minnesota tax my deferred gain if I move to another state?
No. Minnesota has no clawback rule. If you exchange into out-of-state property and sell it after becoming a nonresident, Minnesota does not tax the deferred gain.
Sources
- Minnesota Revenue: 2026 income tax brackets
- Minnesota Revenue: 2023 tax law changes (net investment income tax)
- Minnesota Revenue: net investment income tax
- Minnesota Revenue: deed tax rate
- Minnesota House Research: estate tax
Related: Wisconsin, Iowa, North Dakota, South Dakota and all 50 states.
This page is general information, not tax or legal advice. Minnesota law changes often, so confirm the numbers for your sale with a Minnesota tax advisor.
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