Does South Dakota have a capital gains tax?
No. The South Dakota Department of Revenue says the state “is one of seven states that does not impose a state income tax,” and a gain on a building is income. There is no state rate, no state return for the gain and no state recapture tax. The whole income tax bill on a South Dakota sale is the federal bill.
The state’s revenue comes from other places: sales and use tax, property tax and excise taxes on items such as motor fuel and tobacco. For an apartment owner, that means the tax that matters while you own the building is property tax, and the tax that matters when you sell is federal.
What a South Dakota seller pays on each part of the gain
An individual who owns a South Dakota building directly or through a passthrough entity pays federal tax only. The table splits a typical apartment gain into its pieces.
| Part of the gain | Federal rate in 2026 | South Dakota rate |
|---|---|---|
| Long-term gain (held more than a year) | 0%, 15% or 20%, based on taxable income | None |
| Unrecaptured Section 1250 gain (prior straight-line depreciation) | Up to 25% | None |
| Short-term gain (held a year or less) | Ordinary rates, 10% to 37% | None |
| Section 1245 recapture (often from cost segregation) | Ordinary rates | None |
| Net investment income tax | 3.8% above $200,000 MAGI single or $250,000 joint | None |
2026 federal capital gains brackets for South Dakota sellers
Your federal long-term rate depends on total taxable income, with the gain stacked on top of wages, rents and other ordinary income. IRS Revenue Procedure 2025-32 sets these thresholds for tax year 2026.
- Ordinary income fills the brackets first, so a large gain often lands mostly in the 20% band.
- For joint filers the 2026 ordinary brackets run from 10% up to $24,800 to 37% above $768,700.
- The 3.8% net investment income tax thresholds of $200,000 single and $250,000 joint are set by statute and not indexed.
| Filing status (2026) | 0% up to | 15% up to | 20% above |
|---|---|---|---|
| Married filing jointly | $98,900 | $613,700 | $613,700 |
| Single | $49,450 | $545,500 | $545,500 |
| Married filing separately | $49,450 | $306,850 | $306,850 |
Depreciation recapture on a South Dakota building
South Dakota does not tax recapture, so the federal recapture rules are the only ones that apply. On most apartment sales recapture is a large share of the tax.
Gain equal to the straight-line depreciation you claimed on the building is unrecaptured Section 1250 gain, taxed at your ordinary rate but no higher than 25%. Residential rental buildings depreciate over 27.5 years, so a ten-year owner has typically written off more than a third of the building cost. Items reclassified in a cost segregation study, such as appliances, carpet and some site work, are Section 1245 property, and their recapture is taxed at ordinary rates up to 37%.
The depreciation recapture calculator separates a gain into these parts.
Withholding and the South Dakota transfer fee
South Dakota does not hold back any state income tax at closing, since it has no income tax to collect. Federal FIRPTA withholding still applies to foreign sellers: the buyer generally withholds 15% of the amount realized unless an exception or IRS withholding certificate applies. A U.S. seller who signs a certification of non-foreign status is not affected.
The state cost you will see on the settlement statement is the real estate transfer fee. Under SDCL 43-4-21 it is 50 cents for each $500 of value, or fraction of $500, and the grantor (the seller) pays it. On a $2,000,000 sale the fee is $2,000.
SDCL 43-4-22 lists exemptions from the fee, including transfers between an LLC and its members, transfers in corporate or LLC mergers, gifts and transfers for no consideration. A sale to an outside buyer is not exempt, and the list has no exemption for a sale that is part of a 1031 exchange.
Moving to South Dakota, or owning South Dakota property from another state
Where you live when you sell can matter more than where the building is. Most income-tax states tax their residents on all of their income, including gain on property in South Dakota, and since South Dakota levies no tax there is nothing to claim a credit for.
A South Dakota resident who sells a Sioux Falls building pays federal tax only. A Minnesota or Iowa resident who sells the same building generally owes their home state’s tax on the gain. Owners who are moving to South Dakota often ask about selling after the move; residency rules in the state you are leaving decide whether that works, so get advice from a CPA in that state before you set the closing date.
The reverse is true for South Dakotans who own property elsewhere. A South Dakota resident who sells a building in Fargo still owes North Dakota tax on that gain, because states tax nonresidents on income from property located there.
Worked example: selling a $2 million South Dakota apartment building
A married couple filing jointly bought a 24-unit building in Sioux Falls in 2014 for $1,200,000 and have claimed $380,000 of straight-line depreciation. They sell in 2026 for $2,000,000. Commission and closing costs are $98,000, plus the $2,000 transfer fee, for $100,000 of selling costs and an amount realized of $1,900,000. Their adjusted basis is $820,000, so the gain is $1,080,000.
Their other taxable income is $450,000, which puts them in the 32% bracket that starts at $403,550 for joint filers. The $380,000 of unrecaptured Section 1250 gain is taxed at the 25% cap: $95,000. The other $700,000 is long-term gain above $613,700, taxed at 20%: $140,000. Their MAGI is well over $250,000, so the 3.8% net investment income tax applies to the full gain: $41,040.
- The same sale by a Minnesota resident would add that state’s tax on top; the federal numbers would not change.
- The capital gains tax calculator runs these steps with your own figures.
| Item | Amount |
|---|---|
| Sale price | $2,000,000 |
| Selling costs (including $2,000 transfer fee) | $100,000 |
| Adjusted basis ($1,200,000 cost less $380,000 depreciation) | $820,000 |
| Total gain | $1,080,000 |
| Unrecaptured 1250 gain at 25% | $95,000 |
| Long-term gain of $700,000 at 20% | $140,000 |
| Net investment income tax at 3.8% | $41,040 |
| South Dakota income tax | $0 |
| Total income tax on the sale | $276,040 |
How a 1031 exchange changes the South Dakota tax bill
For a South Dakota resident, a 1031 exchange defers the entire income tax bill, because the federal tax is the only income tax on the sale. In the example, buying a replacement worth at least $1,900,000, reinvesting all net cash and replacing the debt would defer all $276,040.
There is no South Dakota form, conformity question or withholding waiver to arrange. The federal rules decide everything: 45 days to identify, 180 days to close and a qualified intermediary holding the funds. The transfer fee is still paid on the deed you sign, and the replacement’s seller pays the fee on the property you buy if it is in South Dakota.
Our 1031 exchange in South Dakota guide covers paths into and out of the state, and the 1031 exchange rules page covers the deadlines. Skyline buys apartment buildings with five or more units in South Dakota. We buy directly, close on your timeline, and can work inside 1031 deadlines.
Property tax: the South Dakota tax that does move your price
With no income tax, property tax is the largest state-level cost of owning an apartment building in South Dakota, and buyers price it in. Non-agricultural property is valued at market value each year and taxed on 85% of that value, according to the Department of Revenue.
Apartments fall in the “other” class, which pays a higher school levy than owner-occupied homes. In Sioux Falls (Minnehaha County portion) the total levy on other property was $17.960 per $1,000 of taxable value for taxes payable in 2024, which is about 1.53% of market value. The 3% limit on owner-occupied valuation growth from Senate Bill 216 (2025) does not cover rental buildings. Our guide to the property tax rate in South Dakota works through a $2 million example.
A sale-year checklist for South Dakota sellers
Even without a state income tax, a few steps keep the federal bill and the closing clean.
- Pull your depreciation schedules for every year you owned the building, including any cost segregation study, so the recapture figure is right.
- Decide on a 1031 exchange before you sign the sale contract, and line up the intermediary so the contract can be assigned before closing.
- Make estimated federal tax payments for the quarter of the sale if you are not exchanging, to avoid an underpayment penalty.
- Budget the transfer fee and confirm with the title company whether any exemption under SDCL 43-4-22 applies to your deed.
- Gather leases, deposit records and the last three property tax statements, since a buyer will ask for them first.
- If you live in another state, ask a CPA there how your home state will tax the gain.
Other ways South Dakota owners defer or reduce the tax
Because the federal tax is the whole bill, the usual federal tools carry full weight here.
- Installment sale: spreading payments over several years can keep part of the long-term gain in the 15% band, though recapture is generally taxed in the year of sale.
- Holding until death: heirs generally take a stepped-up basis, which erases the built-in gain and the recapture.
- Partial exchange: take some cash and pay federal tax only on that boot, starting with the 25% recapture layer.
- Delaware statutory trust: a passive replacement for owners who want to stop managing property but keep deferring.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
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