1031 Exchange in Minnesota
Minnesota conforms to the federal like-kind exchange rules, so a properly structured 1031 exchange defers Minnesota income tax on the same timeline as federal tax. Minnesota has no clawback and no special annual 1031 reporting. But when gain is eventually recognized, Minnesota taxes capital gains as ordinary income at graduated rates topping out at 9.85% — there is no preferential capital-gains rate. Minnesota also imposes a state deed tax of roughly 0.33% of consideration when the deed is recorded, and that tax is not waived for a 1031 exchange.
Fast Facts
- State Income Tax on Capital Gains
- Minnesota taxes capital gains as ordinary income at its four graduated rates — 5.35%, 6.80%, 7.85%, and 9.85%. There is no separate, lower long-term capital-gains rate.
- Conforms to Federal 1031
- Yes. Minnesota's income tax base starts from federal taxable income, so a valid federal 1031 deferral flows through and is recognized for Minnesota tax on the same timeline.
- Clawback Rule
- No. Minnesota does not track deferred gain on out-of-state replacement property or add it back when later recognized elsewhere. There is no annual 1031 reporting form.
- Nonresident Withholding
- Minnesota has no state-level real estate withholding at closing (no FIRPTA-style equivalent) on conveyances by out-of-state sellers. Federal FIRPTA withholding may still apply to foreign sellers.
- Deed Tax
- Minnesota imposes a state deed tax of 0.0033 (about 0.33%) of net consideration when a deed is recorded. It is not exempt for like-kind exchanges. No general statewide sales tax on real estate.
How Minnesota Treats a 1031 Exchange
Minnesota computes individual income tax starting from federal taxable income and then applies state additions and subtractions (Minn. Stat. § 290.01). Because a valid federal Section 1031 like-kind exchange removes the deferred gain from federal taxable income in the year of the exchange, that deferral carries straight through to the Minnesota return. In practical terms: if your exchange qualifies federally, you do not pay Minnesota income tax on the deferred gain at the time of the exchange.
Minnesota conforms to the current Internal Revenue Code, including the change made by the 2017 Tax Cuts and Jobs Act that limits Section 1031 to real property held for investment or productive use in a trade or business. Personal property and intangibles no longer qualify — at the federal level or in Minnesota.
Unlike a handful of states (such as Oregon and California), Minnesota does not have a clawback. It does not require you to track deferred Minnesota gain on out-of-state replacement property or add that gain back when you eventually sell the replacement property in another state. There is also no Minnesota-specific annual like-kind exchange form to file year after year. The Minnesota Commissioner of Revenue may, by notice and demand, require a qualified intermediary to file a return identifying the parties to exchanges it facilitated, but that is an information request directed at intermediaries — not an ongoing tracking obligation imposed on the investor.
Legal and Tax Considerations
State Income Tax on Capital Gains
Taxed as ordinary income at Minnesota's four graduated rates, topping out at 9.85%. No separate capital-gains rate.
Conforms to Federal 1031
Yes. Minnesota starts from federal taxable income and conforms to the current IRC, so the federal deferral is recognized on the same timeline.
Clawback
None. Minnesota does not add back deferred gain on out-of-state replacement property and imposes no annual 1031 tracking form.
Deed Tax
State deed tax of 0.0033 of net consideration (about 0.33%) is due at recording and is not exempt for a like-kind exchange. Hennepin and Ramsey counties add a 0.0001 Environmental Response Fund tax.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges), filed with your federal return
- Qualified Intermediary exchange agreement and assignment documents
- Complete closing/settlement statements for both the relinquished and replacement properties
- Minnesota records the exchange through the federal-conformed return (no separate annual Minnesota 1031 form)
Clawback Rule
None
Official References
Minnesota Tax Rate and Deed Tax Context
Minnesota does not apply a separate, preferential rate to capital gains. Gain that is recognized from selling investment real estate — including boot in a partial exchange or gain from a failed exchange — is folded into ordinary taxable income and taxed at Minnesota’s four graduated rates: 5.35%, 6.80%, 7.85%, and 9.85%. The 9.85% top rate is among the highest state income tax rates in the country, which is exactly why deferring Minnesota tax through a 1031 exchange can be so valuable. Because Minnesota has no clawback, once you have deferred the gain the state does not chase it into another state — but if you later sell the replacement property in a taxable Minnesota year, the recognized gain is taxed at these ordinary rates.
On the transaction side, the tax to plan for is the deed tax. Minnesota counties collect deed tax when an instrument conveying Minnesota real property is presented for recording, at a rate of 0.0033 of the net consideration (roughly 0.33%). Hennepin and Ramsey counties add a small 0.0001 Environmental Response Fund tax. Critically, the deed tax exemptions in Minn. Stat. § 287.22 do not include like-kind or 1031 exchanges — so when you acquire Minnesota replacement property, expect the deed tax to apply based on the consideration for that conveyance. If the replacement property is financed with a mortgage recorded in Minnesota, a separate Mortgage Registry Tax of 0.0023 of the debt secured also applies. These are recording-side transaction taxes and are independent of whether your exchange defers income tax.
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
For a delayed exchange, you must set up a Qualified Intermediary (QI) before you close on the relinquished property. You cannot take actual or constructive receipt of the sale proceeds — the QI holds the funds throughout the exchange. This is a federal requirement that applies to Minnesota exchanges.
- 2
Sell the Relinquished Property
Close the sale of your relinquished property with the QI receiving the proceeds. You will report the disposition on federal Form 8824, which carries through to your Minnesota return because Minnesota starts from federal taxable income.
- 3
Identify Replacement Property Within 45 Days
You have 45 calendar days from the sale of the relinquished property to formally identify potential replacement property in writing, following the federal identification rules (such as the three-property rule or the 200% rule).
- 4
Close on Replacement Property Within 180 Days
You must acquire the replacement property within 180 calendar days of the sale (or your tax-return due date including extensions, if earlier). Only real property held for investment or business use qualifies under post-2017 federal law, which Minnesota follows.
- 5
File Federal Reporting and Budget for Deed Tax
Report the exchange on federal Form 8824; the deferral flows to your Minnesota return with no separate annual Minnesota 1031 form. If your replacement property is in Minnesota, budget for the state deed tax (about 0.33% of consideration) and, if applicable, Mortgage Registry Tax at recording.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Frequently Asked Questions
Yes. Minnesota's income tax base begins with federal taxable income (Minn. Stat. § 290.01), so a properly structured federal 1031 like-kind exchange defers Minnesota income tax on the same timeline as federal tax. Minnesota also conforms to the current Internal Revenue Code, including the 2017 change that limits Section 1031 to real property held for investment or business use.
No. Minnesota does not have a clawback. It does not track deferred Minnesota gain on out-of-state replacement property or add that gain back when you later sell the replacement property in another state, and there is no Minnesota-specific annual like-kind exchange reporting form. The Commissioner of Revenue may require a qualified intermediary to file a return identifying parties to exchanges it facilitated, but that is an information request to intermediaries, not an ongoing obligation on the investor.
Minnesota taxes capital gains as ordinary income at its four graduated rates — 5.35%, 6.80%, 7.85%, and 9.85% — with no separate, lower long-term capital-gains rate. Any gain that is recognized, including boot in a partial exchange or gain from a failed exchange, is taxed at the applicable ordinary rate. Check the Minnesota Department of Revenue rate charts for the current bracket thresholds, which are inflation-adjusted each year.
Yes. Minnesota imposes a state deed tax of 0.0033 of net consideration (about 0.33%) when a deed conveying Minnesota real property is recorded, and the exemptions in Minn. Stat. § 287.22 do not include like-kind or 1031 exchanges. Hennepin and Ramsey counties add a 0.0001 Environmental Response Fund tax. A separate Mortgage Registry Tax of 0.0023 of the secured debt applies if the purchase is financed with a recorded Minnesota mortgage.
Minnesota does not have a state-level real estate withholding requirement at closing (no FIRPTA-style equivalent) on conveyances by out-of-state sellers. Federal FIRPTA withholding can still apply when the seller is a foreign person. A 1031 exchange routed through a qualified intermediary generally avoids current recognition of gain in any case.
Related Guides
- What Is a 1031 Exchange? — the complete federal framework, deadlines, and rules
- 1031 Exchange by State — compare Minnesota with other states’ rules and clawback provisions
- Duluth, MN
References
Official References
- Minnesota Department of Revenue — Income Tax Rates and Brackets
- Minnesota Department of Revenue — Deed Tax
- Minnesota Department of Revenue — Deed Tax Rate
- Minnesota Department of Revenue — Mortgage Registry Tax
- Minn. Stat. § 287.22 — Deed Tax Exemptions
- Minn. Stat. § 290.01 — Definitions (income tax base)
- IRS Form 8824 — Like-Kind Exchanges
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.