Minnesota Capital Gains Tax on Real Estate

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

Does Minnesota have a capital gains tax?

Minnesota capital gains tax on real estate is the state individual income tax applied to your gain, because Minnesota gives long-term gains no lower rate. A fourplex you held for 25 years is taxed at the same 5.35% to 9.85% rates as a paycheck.

On top of that, Minnesota is one of the few states with its own net investment income tax. Since tax year 2024, individuals, estates and trusts pay an extra 1% on net investment income above $1,000,000 (Minn. Stat. 290.033). A large apartment sale is exactly the kind of event that crosses that line, so a seller with a seven-figure gain can face a top state rate of 10.85% on the slice above $1 million.

Minnesota income tax brackets for 2026

Minnesota has four rates, and the Department of Revenue adjusted the bracket thresholds for inflation for tax year 2026 in its December 16, 2025 release. The rates themselves did not change.

• The 2026 standard deduction is $15,300 for single filers and $30,600 for joint filers.
• Short-term and long-term gains are taxed alike in Minnesota. The one-year holding period matters only on your federal return.
• Most of the gain on an apartment building lands in the 9.85% bracket, which starts at $337,931 of Minnesota taxable income on a joint return.

Minnesota’s 1% net investment income tax

The Minnesota net investment income tax is 1% of net investment income over $1,000,000, and it applies on top of the regular income tax. It took effect in tax year 2024 under the 2023 tax law, and the Department of Revenue describes the income it covers as interest, dividends, capital gains, rental and royalty income, less related expenses such as investment interest and advisory fees.

Minnesota borrows the definition of net investment income from Section 1411(c) of the Internal Revenue Code, the same section behind the federal 3.8% tax. That means gain on a rental building generally counts, while income from a trade or business in which you materially participate generally does not. The statute carves out gain on class 2a agricultural land. A nonresident pays the tax only on the share of net investment income allocable to Minnesota.

The 2026 tax bill (Laws 2026, chapter 128) adjusts the definition for opportunity zone gains starting with tax years that begin after December 31, 2026. It did not change the 1% rate or the $1,000,000 threshold.

How Minnesota and federal capital gains tax stack

The federal and Minnesota taxes are figured separately and added together. Federal long-term gain is taxed at 0%, 15% or 20%, and Revenue Procedure 2025-32 puts the start of the 20% bracket for 2026 at $613,700 of taxable income on a joint return and $545,500 for a single filer.

The part of your gain equal to depreciation you claimed on the building is unrecaptured Section 1250 gain, taxed federally at up to 25%. The federal 3.8% net investment income tax applies once modified adjusted gross income passes $250,000 on a joint return or $200,000 for a single filer.

Put those together with Minnesota’s top rate and the 1% state surtax and a high-income seller can face four separate layers on the same dollar of gain: up to 25% federal, 3.8% federal NIIT, 9.85% Minnesota and 1% Minnesota NIIT. Your Minnesota tax gives little federal benefit, because the state and local tax deduction on the federal return is capped.

Is there Minnesota withholding when a nonresident sells?

Minnesota’s nonresident withholding rules, as the Department of Revenue describes them, apply to pass-through entities, not to the closing. That sets Minnesota apart from states such as Oregon or South Carolina, where escrow or the buyer holds back tax from a nonresident seller.

If your building is held in a partnership or S corporation, the entity generally must withhold 9.85% of a nonresident individual owner’s Minnesota-source distributive income, which includes that owner’s share of the gain on a sale. Withholding applies to owners with at least $1,000 of Minnesota-source income who are not part of a composite return, and it does not apply if the entity makes the pass-through entity tax election. An owner can ask to reduce withholding with Form AWC.

A nonresident who owns the building directly still owes Minnesota tax on the gain from Minnesota real estate and files a Minnesota nonresident return. Nothing is held back at the closing table, so plan estimated payments.

Depreciation recapture in Minnesota

Minnesota taxes depreciation recapture as ordinary income at its regular rates, so the recaptured portion of your gain is taxed at up to 9.85% just like the rest. The federal 25% cap on unrecaptured Section 1250 gain has no Minnesota equivalent.

The bigger Minnesota difference is bonus depreciation. Minnesota requires you to add back 80% of federal Section 168(k) bonus depreciation in the year you claim it (Minn. Stat. 290.0131, subd. 9), then lets you subtract it in equal fifths over the next five years (290.0132, subd. 9). If you bought a building and ran a cost segregation study, your Minnesota depreciation schedule runs behind your federal one for a few years.

That gap shows up at sale. If you sell before the five-year subtraction is complete, your Minnesota basis can be higher than your federal basis, and the remaining delayed depreciation needs to be accounted for on the final returns. Give your CPA both schedules before you list. Laws 2026, chapter 128 moved Minnesota’s tie to the Internal Revenue Code to May 1, 2026, but the 80% bonus addback in the statute is unchanged.

Worked example: selling a $2M apartment building in Minnesota

A married couple filing jointly sells a 20-unit building in St. Cloud for $2,000,000 and pays $100,000 in selling costs. They bought it for $1,100,000 and have claimed $350,000 of depreciation, so their adjusted basis is $750,000 and their gain is $1,150,000: $350,000 of unrecaptured Section 1250 gain and $800,000 of long-term capital gain. They have $250,000 of other taxable income, on both returns, and the building carries a $900,000 loan.

Federal tax: the $350,000 of Section 1250 gain at the 25% maximum is $87,500. The $800,000 capital gain sits on top of $600,000 of income, so $13,700 is taxed at 15% ($2,055) and $786,300 at 20% ($157,260). The 3.8% federal NIIT on $1,150,000 is $43,700. Federal total: $290,515.

Minnesota tax: the first $87,930 of gain fills the rest of the 7.85% bracket ($6,903), and the other $1,062,070 is taxed at 9.85% ($104,614), for $111,516. Their net investment income is $1,150,000, which is $150,000 over the threshold, so the Minnesota NIIT is $1,500. Minnesota total: $113,016.

Combined tax is $403,531, about 35% of the gain. After paying off the loan, the couple nets $1,000,000 before tax and about $596,469 after.

How a 1031 exchange changes the Minnesota tax

A properly structured 1031 exchange defers the Minnesota tax along with the federal tax, because Minnesota starts from federal taxable income and follows Section 1031. In the example, buying a replacement worth at least $1,900,000 and reinvesting all $1,000,000 of net cash would push the full $403,531 into the future, including the Minnesota NIIT.

Minnesota is not one of the states with a clawback or tracking rule. Owners who exchange a Minneapolis building for one in South Dakota or Florida do not file an annual Minnesota tracking form of the kind Oregon requires. Ask your CPA how a later taxable sale would be treated if you have moved out of Minnesota by then. Our page on the 1031 exchange in Minnesota covers paths, pass-through withholding and a worked exchange.

Cash you keep in a partial exchange is boot and is taxed by both governments. The 1031 exchange calculator runs the federal side for your own figures.

Spreading a sale under the $1 million line

Because the Minnesota NIIT only reaches net investment income above $1,000,000 in a single tax year, the timing of a gain matters more in Minnesota than in most states. In the example above, the couple’s $1,150,000 gain in one year produces $1,500 of state NIIT. If the same gain were reported as $575,000 in each of two years through an installment sale, neither year would cross the threshold and the state surtax would be zero.

The saving grows with the size of the deal. On a $3,000,000 gain reported in one year, the Minnesota NIIT is $20,000. Installment treatment has its own costs, including seller financing risk and the federal rule that ordinary-income recapture, such as on cost-segregated personal property, is reported in the year of sale, so weigh it with your CPA before you agree to terms.

Ways Minnesota sellers lower the tax

Timing and deferral do most of the work, since Minnesota offers no rate break on real estate gains.

• A 1031 exchange, which defers federal tax, Minnesota income tax and the Minnesota NIIT.
• An installment sale that keeps each year’s net investment income under $1,000,000, which can avoid the 1% state surtax entirely.
• Holding until death, so heirs receive a stepped-up basis for federal and Minnesota purposes.
• Documenting capital improvements, which raise basis and cut gain taxed at up to 9.85% plus the federal rate.
• Using any capital loss carryforwards in the year of sale.

Selling a Minnesota apartment building

Skyline buys apartment buildings with five or more units in Minnesota, from Minneapolis and St. Paul to Rochester, Duluth and St. Cloud. We buy directly, close on your timeline, and can work inside 1031 deadlines. If splitting the sale across tax years would keep you under the $1 million NIIT line, we can talk about structure and closing dates.

For the carrying cost a buyer will underwrite, see our page on the property tax rate in Minnesota. For St. Paul’s rent cap and the tenant rules that come with the building, see Minnesota landlord-tenant law for apartment owners. The capital gains tax calculator runs the federal side.