Capital gains tax in Minnesota (2026): selling a business, real estate or farm

Minnesota's own net investment income tax

In 2023 the Legislature added a second layer that most states do not have. For taxable years beginning after December 31, 2023, individuals, estates and trusts pay 1% on net investment income above $1,000,000 (Minn. Stat. 290.033(b)). It sits on top of the regular income tax, which already reaches 9.85% for 2026, so the top Minnesota rate on a large investment gain is effectively 10.85%.

The base borrows the federal definition from IRC 1411(c): interest, dividends, rents, capital gains and income from passive activities. That borrowing matters for business owners. Federal law leaves out gain on property held in a trade or business in which the owner materially participates, so an active owner selling operating assets is usually outside both the 3.8% federal tax and the Minnesota 1%. A landlord or a passive investor is not. The net investment income tax analysis covers the material participation tests.

Farmland and the class 2a carve-out

Minnesota wrote one exclusion into the 1% tax (enacted 2023) that the federal version does not have: net gain from selling property classified as class 2a under Minn. Stat. 273.13, subd. 23, which is agricultural land and buildings (Minn. Stat. 290.033(a)). When a parcel has more than one classification, only the acreage the county assessor attributes to class 2a qualifies, per the Department of Revenue. So a farmer selling cropland can avoid the 1% as long as the parcel is classified 2a, while the same family selling a lake lot or an apartment building cannot.

The regular 9.85% rate (2026) still applies to the farm gain. Farm sellers should also look at the farm installment sale, because farm property is exempt from the Section 453A interest charge under IRC 453A(b)(3)(B).

No credit, and it follows nonresidents

Two features make the Minnesota 1% (2026) stickier than the regular tax. First, the Department of Revenue states that the credit for taxes paid to another state cannot be claimed against it. Second, a nonresident or part-year resident computes the tax as if a full-year resident and then multiplies by the share of net investment income allocable to Minnesota under Minn. Stat. 290.17 (290.033(c)). A Wisconsin or Florida resident selling a Minnesota rental building over $1 million of gain owes it.

The 1% also cannot ride on a 2026 composite return or the pass-through entity tax election; it is reported on Form M1 or M2. Plan estimated payments for the sale year, since the same estimated tax rules apply.

Why spreading the gain works so well here

The $1,000,000 threshold in 290.033 is a fixed number in the statute, and it applies year by year. That gives an installment sale a clean target: keep each year's net investment income under $1 million and the 1% disappears. In the worked example, four payments of $750,000 of gain pull the Minnesota share from $315,500 to $295,500, and total tax falls by $113,521 once the federal bracket and 3.8% effects are counted.

The regular brackets help a little too: for 2026, 9.85% begins at $337,930 for joint filers, so a seller with modest other income keeps some of each payment in the 5.35%, 6.80% and 7.85% brackets (Minnesota DOR, 2026). A note brings buyer credit risk, so the seller financing guide covers down payments, mortgages and default terms.

Nonresidents selling a Minnesota business

Minnesota reaches further than most states into a nonresident's business sale. Under Minn. Stat. 290.17, subd. 2, gain on the sale of goodwill, or income from a covenant not to compete, connected with a business operating in Minnesota is allocated to Minnesota to the extent the business's income was allocable to Minnesota in the year before the sale. Gain on a partnership interest is allocated by the ratio of partnership tangible property in Minnesota, or by the sales factor if intangibles are more than half the value. Moving to another state shortly before selling a Minnesota company does not take the goodwill with you. Read the residency change analysis before you rely on a move, and test the personal goodwill angle with this rule in mind.

Estate tax and the hold-or-sell choice

Minnesota has its own estate tax with a $3,000,000 exclusion for decedents dying in 2020 and later (Minn. Stat. 291.016) and rates from 13% up to 16% above $10.1 million of taxable estate (Minn. Stat. 291.03). A seller who holds instead of selling gets a step-up at death that wipes out the 9.85% income tax on built-in gain, but the whole value then counts toward the Minnesota estate tax. For deeds, the seller-side cost is the deed tax of 0.33% of net consideration over $3,000 (Minn. Stat. 287.21). For the federal 0%, 15% and 20% brackets (20% above $613,700 joint taxable income, Rev. Proc. 2025-32, 2026), see how long-term capital gains are taxed. Get the Big Sale Tax Analysis to model the sale, the note and the hold in one comparison.

Run your own numbers

Frequently asked questions