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

Two rate schedules, and the gain sits on top

Montana rebuilt its income tax for 2024 around two schedules. Ordinary income pays 4.7% and then 5.65% for 2026. Net long-term capital gains get their own lower schedule under MCA 15-30-2103(2): 3.0% and 4.1%. The statute stacks the gain on top: the 3.0% band covers the first $95,000 for joint filers ($47,500 single, $71,250 head of household) less your nonqualified taxable income, meaning everything that is not net long-term gain. If your other taxable income is $95,000 or more, all of the gain is taxed at 4.1% (2026).

For most business or land sellers, that means 4.1% on nearly the whole gain. In the worked example the couple's $120,000 of other income fills most or all of the band, so the state layer is $90,475, close to 4.1% of the long-term gain plus 5.65% of the recapture. A retiree with little other income keeps up to $95,000 of gain at 3.0% (2026).

What counts as net long-term capital gain in Montana

The statute borrows the federal definition from IRC 1222 (MCA 15-30-2103(3), 2026). That pulls in long-term gain on stock, land and buildings held over a year, including Section 1231 gain that federal law treats as long-term capital gain. It leaves out three things sellers often assume are included:

• Section 1245 recapture on equipment, vehicles and breeding stock is ordinary income, taxed at up to 5.65% (2026).
• Short-term gain, on assets held a year or less, is ordinary.
• Qualified dividends are Montana ordinary income under the 2024 Form 2 instructions, even though they get capital gain rates federally.

Montana taxable income starts from federal taxable income with Montana additions and subtractions (Form 2 instructions, 2024). Federal rates still apply on top: 0%, 15% or 20%, with 20% above $613,700 of joint taxable income (Rev. Proc. 2025-32, 2026). See how long-term capital gains are taxed.

Allocation costs real money in Montana

Because the two schedules differ by 1.55 points at the top for 2026 (5.65% versus 4.1%), Montana is one of the few states where the purchase price allocation moves the state bill as well as the federal one. In example two, the buyer's request to push $300,000 more of price into machinery raises Montana tax from $90,475 to $95,125, and total tax by $43,650, most of it federal recapture at ordinary rates. Ranch sales are where this shows up: buyers want depreciable equipment, cattle and improvements, while sellers want land and goodwill. The depreciation recapture analysis shows how each class is measured.

Selling in 2026 or 2027

House Bill 337 (2025) changes both schedules for 2027. The top ordinary rate drops to 5.4% and the brackets widen to $130,000 joint and $97,500 head of household; the capital gains rates stay 3.0% and 4.1%, with the 3.0% band widened to match (Montana DOR, HB 337 summary). After 2027 the brackets are indexed using June 2026 CPI as the base (MCA 15-30-2103, effective January 1, 2027).

For a seller with large recapture, closing in January 2027 instead of December 2026 trims the ordinary rate by a quarter point. For the long-term gain itself, the year matters less in Montana than the size of your other income in that year. A year-end timing review weighs both.

Installment sales and nonresidents

Montana follows the federal installment method through federal taxable income, so a Section 453 installment sale reports each year's gain as it is received, still at 4.1% (2026) for most sellers with other income. Farm and ranch notes avoid the federal Section 453A interest charge, since farm property is exempt under IRC 453A(b)(3)(B); see the farm installment sale. If you move away and keep the note, Montana still claims part of it: the Form 2 instructions (2024) tell nonresidents to report interest received from an installment sale of real property or tangible business property located in Montana as Montana-source income. The seller financing guide covers the deed of trust, down payment and default terms that protect a seller carrying paper.

Deferral and holding

A 1031 exchange defers Montana tax along with federal tax, because Montana starts from federal taxable income. With a top capital gains rate of 4.1% for 2026, the Montana layer rarely drives the decision by itself; the federal 20% and 3.8% layers, and the 25% rate on unrecaptured Section 1250 gain under IRC 1(h), usually matter more. Families weighing a sale against a step-up at death or a charitable remainder trust should model all three. Get the Big Sale Tax Analysis for a side-by-side comparison.

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Frequently asked questions