1031 Exchange in Minnesota

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Minnesota recognize 1031 exchanges?

Yes. A Minnesota 1031 exchange is treated the same way it is federally, because Minnesota’s individual income tax starts from federal taxable income, so gain deferred federally under Section 1031 is deferred for Minnesota too. The 2026 tax law (Laws 2026, chapter 128) moved Minnesota’s tie to the Internal Revenue Code forward to May 1, 2026.

Deferral is worth a lot in Minnesota. The state taxes gains as ordinary income at up to 9.85%, and since 2024 it adds 1% on net investment income over $1,000,000. On a large apartment sale, the Minnesota share alone can approach a tenth of the gain.

Federal 1031 rules that apply in Minnesota

Minnesota adds no deadlines of its own, so the federal timeline controls. You have 45 days from the sale to identify replacement property in writing and 180 days, or your return due date if earlier, to close on it. Both properties must be real property held for investment or business use, and a qualified intermediary must hold the proceeds so you never have access to them.

To defer all the gain, buy a replacement of equal or greater value and reinvest all the net cash. Cash you keep, or debt paid off that you do not replace, is boot and is taxed by both the IRS and Minnesota. Our guide to 1031 exchange rules covers identification and boot in full, and the complete 1031 exchange guide walks through an exchange from start to finish.

What a Minnesota exchange defers

A full exchange defers three layers of tax at once: federal income tax, Minnesota income tax and the Minnesota net investment income tax.

Minnesota withholding at closing and how an exchange affects it

Minnesota does not require a closing agent to withhold income tax from a seller, as the Department of Revenue describes its nonresident withholding rules, so there is no form to file at the closing table and no state hold-back to plan around. That is a real difference from Oregon or South Carolina.

The rule to watch is for pass-through entities. A partnership or S corporation generally must withhold 9.85% of a nonresident individual owner’s Minnesota-source distributive income, unless the owner joins a composite return or the entity makes the pass-through entity tax election. In a full exchange there is no recognized gain to pass through. If the exchange leaves boot, the recognized gain flows to the owners, and a nonresident partner’s share can be subject to that 9.85% withholding.

• Tell your CPA early if any owner of the LLC lives outside Minnesota.
• Decide before closing whether the entity will make the pass-through entity tax election for the year of sale.
• A nonresident owner can apply to reduce withholding with Form AWC.

Does Minnesota have a 1031 clawback?

No. Minnesota is not one of the states with a clawback or tracking rule, which are California, Massachusetts, Montana and Oregon. An owner who sells in Minnesota and buys a replacement in South Dakota, Florida or Texas does not file an annual Minnesota form tracking the deferred gain.

That does not mean the gain disappears. The deferred gain carries into the replacement property’s basis for federal purposes, and Minnesota starts from federal income. How Minnesota treats a later taxable sale depends on where you live and where the property is at that time, so ask your CPA to map it out if you are planning both an exchange out of state and a move.

Does Minnesota regulate qualified intermediaries?

No. Minnesota is not one of the nine states with a law regulating qualified intermediaries: California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. A Minnesota intermediary does not have to post a state bond or carry state-mandated insurance.

That makes your own checks more important, because the intermediary may hold your entire equity for up to 180 days.

• Ask for proof of a fidelity bond and errors and omissions coverage, and the amounts.
• Ask whether your funds sit in a separate account in your name or a pooled account, and who must sign to move money.
• Ask for written statements while your funds are held.
• Confirm the intermediary is not your agent from the past two years, such as your attorney, CPA, employee or broker.

Common 1031 exchange paths for Minnesota owners

Most Minnesota exchanges follow one of four paths, and each has a different tax picture.

Minnesota to Minnesota is common among owners trading up within the Twin Cities or moving equity to Rochester, St. Cloud or Duluth. Everything stays under one state’s rules, and the deferred gain stays in a Minnesota property.

Minnesota to a state without an income tax, such as South Dakota, Florida or Texas, appeals to owners who plan to retire there. The exchange works the same way, and there is no Minnesota tracking form.

Some owners leave St. Paul to avoid its 3% rent cap, or exchange out of buildings that face rising property taxes. Others buy into a Delaware statutory trust for a passive replacement.

Out-of-state owners exchanging into Minnesota face no Minnesota clawback. If they came from a state with its own tracking rule, such as California or Oregon, that state’s filings follow them.

Worked example: a Minnesota exchange into South Dakota

A married couple in Edina sells a 20-unit building in Minneapolis for $2,000,000. After $100,000 of selling costs and with an adjusted basis of $750,000, the gain is $1,150,000. The $900,000 loan is paid off, the couple takes $100,000 in cash at closing, and the intermediary receives the other $900,000.

They buy a $2,100,000 building in Sioux Falls with the $900,000 of exchange funds and a new $1,200,000 loan. The $100,000 they took is boot, so $100,000 of gain is recognized and $1,050,000 is deferred. If they are in Minnesota’s 9.85% bracket, the Minnesota tax on the boot is about $9,850 and the Minnesota income tax deferred is about $103,425. Their net investment income from the sale is $100,000, far below $1,000,000, so no Minnesota NIIT is due. Had they sold outright, the $1,150,000 gain would have added $1,500 of Minnesota NIIT.

No Minnesota tax is withheld at closing because they own the building directly. Had they taken no cash and reinvested all $1,000,000, the entire $1,150,000 would be deferred.

Trading down: when the replacement costs less

Buying a cheaper replacement creates boot even if you never touch the cash. Suppose the Edina couple reinvested all $1,000,000 of net proceeds but bought a $1,700,000 building with a $700,000 loan. Their amount realized on the Minneapolis sale was $1,900,000, so $200,000 of value went unreplaced, and the $900,000 loan paid off was only partly replaced by new debt. That $200,000 is taxed as boot.

At Minnesota’s 9.85% rate, the state tax on that boot is about $19,700, on top of federal tax. The fix is to buy at least as much as you sold, or to add cash of your own to cover any drop in debt. Your intermediary and CPA can run the numbers on each candidate property during the 45-day window.

Selling expenses such as broker commissions and title costs reduce the amount you need to reinvest, which is why the target in the example is $1,900,000 rather than the $2,000,000 sale price. Not every line on a settlement statement is a selling expense, so ask your CPA to sort them before closing, since items that are not, paid out of exchange funds, can leave you with taxable boot.

Timeline tips for a Minnesota exchange

Start the replacement search before you list. The 45-day clock starts at closing, and owners buying out of state often need to visit buildings in a new market inside that window.

• Sign the exchange agreement and assign the purchase agreement before closing, not at the table.
• If you sell late in the year, file an extension so your return due date does not cut the 180 days short.
• Keep a separate Minnesota depreciation schedule: Minnesota adds back 80% of federal bonus depreciation and subtracts it over five years, so state and federal basis can differ on the replacement.
• If the property is in St. Paul, give the buyer the certificate of occupancy date and any rent stabilization approvals early.

Selling a Minnesota apartment building as part of an exchange

Skyline buys apartment buildings with five or more units in Minnesota. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the assignment and can set a closing date that gives you time to find a replacement before your 45 days start.

For the tax you would owe without an exchange, see Minnesota capital gains tax on real estate. The 1031 exchange calculator runs the federal side for your own numbers.