The short answer
A Minnesota investor who sells rental or commercial property through a 1031 exchange defers Minnesota income tax on the gain as well as federal tax, since Minnesota builds its return on the federal figures. Sold outright, the gain is taxed at Minnesota's graduated rates, which reach 9.85% above $337,930 of taxable income for joint filers in 2026, and a large sale can also trigger the state's 1% net investment income tax on investment income over $1,000,000. Minnesota takes nothing at the closing table and does not track deferred gain afterward, but the 0.33% deed tax is paid on the sale deed and a Certificate of Real Estate Value must be filed.
Minnesota at a glance
| Top income tax rate | 9.85% above $337,930 (married joint) or $203,150 (single) for tax year 2026 |
|---|---|
| Net investment income tax | 1% on Minnesota net investment income over $1,000,000, tax years from 2024 |
| Farmland carve-out | Gain on class 2a agricultural land is excluded from the 1% NIIT (Minn. Stat. 290.033) |
| Closing withholding | None; nonresidents report gain on Minnesota-located property on a nonresident return |
| Deed tax | 0.33% of net consideration; 0.34% in Hennepin and Ramsey counties (ERF tax) |
| Certificate of Real Estate Value | Required on any sale over $3,000 (Minn. Stat. 272.115), filed as an eCRV |
| Class rates | Apartments (4+ units) 1.25%; commercial 1.5% then 2.0%; homestead 1.0% to $500,000 |
| Claw-back on out-of-state replacement | None |
Minnesota taxes the gain at up to 9.85%, and a big sale adds a 1% investment income tax
Minnesota has no special capital-gains rate. Gain from selling a Twin Cities fourplex or a Rochester office building is ordinary income on Form M1 and runs through four brackets: 5.35%, 6.80%, 7.85% and 9.85%. For 2026 the Department of Revenue set the top bracket at income above $337,930 for married joint filers and $203,150 for single filers, after a 2.37% inflation adjustment.
Since tax year 2024, Minnesota also charges a net investment income tax of 1% on net investment income above $1,000,000. The base follows the federal definition in IRC 1411(c), which includes capital gains and rental income, so one large closing can trigger it in the year of sale. Schedule NIIT is filed with Form M1, and the department states that the credit for taxes paid to another state cannot be claimed against it.
The department's own list of federal net investment income is worth reading against a rental portfolio: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses that are passive activities to the taxpayer under IRC section 469. A landlord's rents and the gain on the building both land in the base.
Deferring the gain through an exchange keeps it out of both calculations. For a landlord whose ordinary income is modest, that can be the difference between a 5.35% or 6.80% year and one taxed at 9.85% plus 1%.
The farmland exception inside the 1% tax
Minn. Stat. 290.033(a) excludes from the net investment income tax the net gain on disposition of property classified as class 2a agricultural land. A farm owner selling tillable acres faces the graduated income tax on the gain but not the extra 1%, while an owner selling an apartment building faces both.
The exclusion is keyed to class 2a, which covers agricultural land and its buildings. Class 2b rural vacant land and a non-homestead rental house on the farm are classified differently and get no relief, so check the county assessor's classification before planning the sale.
No withholding at closing, but Minnesota-located property is Minnesota-source income for nonresidents
Minnesota does not make a buyer, closing company or attorney hold back state income tax when the seller lives out of state, and there is no Minnesota form for it. The state relies on the nonresident return instead.
The Department of Revenue's allocation rules assign capital gains from the sale of tangible assets located in Minnesota to Minnesota, so a Wisconsin or Arizona owner of a Duluth rental owes Minnesota tax on the sale. Nonresidents also pay the 1% net investment income tax on the share of investment income allocated to Minnesota (Minn. Stat. 290.033(c)).
Holding the property in an LLC or partnership does not change the answer. The same allocation rules assign gain on the sale of a partnership interest to Minnesota when the partnership's assets are located in Minnesota, and gain from an installment sale of a Minnesota capital asset is assigned to Minnesota while the interest portion is not.
An exchange removes the gain from that allocation for the year, and Minnesota has no claw-back rule: it never tracks deferred gain into replacement property in another state. If you later sell the replacement property in a taxable sale, Minnesota's claim depends only on where you and the property are at that time.
Deed tax at 0.33%, 0.34% in Hennepin and Ramsey, plus the eCRV
Minnesota's deed tax is 0.0033 of the net consideration on every deed conveying Minnesota real property (Minn. Stat. 287.21). Hennepin and Ramsey counties add an environmental response fund tax of 0.0001, so a $1,000,000 Minneapolis or St. Paul sale carries $3,400 in deed tax versus $3,300 elsewhere in the state.
When the consideration is $3,000 or less the tax is a flat $1.65. The buyer separately pays mortgage registry tax on any new financing, 0.0023 of the loan plus the same 0.0001 environmental response fund add-on in Hennepin County, so a $1,000,000 mortgage recorded there costs $2,400; an exchange does not affect it.
Any sale over $3,000 also requires a Certificate of Real Estate Value under Minn. Stat. 272.115, filed by the grantor, grantee or their agent when the deed is presented for recording, now handled electronically as an eCRV. Your buyer's deed is recorded at the full price regardless of the exchange, so deed tax and the eCRV are unchanged by it.
Class rates: why a fourplex and a homestead are taxed on different percentages
Minnesota does not reassess on sale; it converts market value into net tax capacity through class rates in Minn. Stat. 273.13. A residential homestead is 1.0% of the first $500,000 of value and 1.25% above. Class 4a apartments with four or more units are 1.25% of full value, class 4b one-to-three-unit non-homestead rentals are 1.25%, and class 3a commercial and industrial property is 1.5% of the first tier and 2.0% of the rest.
For an investor the practical point is that the tax bill on a rental follows its class, not its price history, so buying Minnesota replacement property does not trigger a reassessment tied to the purchase.
Replacement property
DST income, the 1% NIIT and the credit Minnesota will not give
Choosing a Delaware Statutory Trust as replacement property completes the Minnesota deferral the same way a deeded purchase would, with no deed tax or eCRV on the replacement side because you acquire a trust interest rather than Minnesota land.
A Minnesota resident then reports the DST's rental income on Form M1 at the graduated rates, and that income counts as net investment income for the 1% tax if the $1,000,000 line is crossed; the department says the other-state credit does not offset the NIIT, so a Minnesota resident in a large DST program should model that cost with a CPA. Distributions from properties in states with their own income tax may also require nonresident returns in those states.
Because Minnesota has no claw-back, a nonresident who exchanges Minnesota property into a DST holding property elsewhere leaves the Minnesota tax system entirely for that gain. Confirm the treatment for your situation with the Minnesota Department of Revenue and your CPA, and look at the other investment types if a cash-out DST fits your plan better.
Questions investors ask about 1031 exchanges in Minnesota
Does Minnesota have a lower tax rate for long-term capital gains?
No. Gain on Minnesota investment property is taxed as ordinary income at 5.35% to 9.85%, and net investment income above $1,000,000 draws the additional 1% tax.
Will I owe the 1% net investment income tax if I sell farmland?
Not on the land itself: Minn. Stat. 290.033 excludes net gain on class 2a agricultural property. Gain on other property and rental income still count.
Is anything withheld at closing when an out-of-state owner sells Minnesota property?
No. Minnesota has no real estate withholding; the nonresident owner reports the Minnesota-source gain, or the exchange, on a nonresident return.
How much deed tax is due on a $2,000,000 Hennepin County sale?
$6,800: 0.0033 state deed tax ($6,600) plus the 0.0001 environmental response fund tax ($200). Outside Hennepin and Ramsey it would be $6,600.
Does Minnesota track my deferred gain after I exchange out of state?
No. Minnesota has no claw-back or deferred-gain reporting rule; its tax on the gain ends when the exchange is completed unless you are a Minnesota resident when the replacement property is later sold.
Where do Minnesota's 2026 brackets fall for a single filer selling a rental?
For tax year 2026 a single filer pays 5.35% up to $33,310, 6.80% to $109,430, 7.85% to $203,150 and 9.85% above that. A gain of several hundred thousand dollars from one sale lands mostly in the 9.85% bracket unless it is deferred.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the Minnesota tax agency before you close. This page is general information, not tax or legal advice.
- Minnesota DOR, income tax brackets, standard deduction and dependent exemption amounts for tax year 2026
- Minnesota DOR, Net Investment Income Tax (NIIT)
- Minn. Stat. 290.033, Net Investment Income Tax
- Minnesota DOR, How Minnesota Taxes Nonresident Income
- Minnesota DOR, Deed Tax Rate
- Minn. Stat. 287.21, Deed Tax, imposition and determination
- Minn. Stat. 272.115, Certificate of Value
- Minn. Stat. 273.13, Classification of Property