Short answer: Minnesota has no separate capital gains rate: the gain on a business sale is taxed on the same graduated schedule as wages, with a top rate of 9.85%, plus a 1% tax on net investment income over $1 million. A structured installment sale under IRC §453 spreads eligible gain as principal is received, which can keep more of it out of the top bracket and under the $1 million line each year. Inventory, receivables, and depreciation recapture stay in the year of sale.
Selling a business in Minnesota puts the gain on the same return as wages. The state has no separate capital-gains rate. The Department of Revenue taxes Minnesota taxable income on one graduated schedule, and the top rate is 9.85 percent. Minnesota also imposes a 1 percent tax on net investment income over $1 million. A lump-sum sale of a closely held manufacturer, contractor, distributor, or med-tech supplier can run most of that gain through the top bracket, and through the $1 million line, in a single year.
A structured installment sale under IRC §453 spreads eligible gain as principal is received. It does not erase the tax. Inventory, receivables, and depreciation recapture stay in the year of sale. The Minnesota state guide is the statewide overview, and capital gains tax by state lists the others. Selling a business in California and selling a business in New Jersey are the parallel notes.
Update this box when the brackets change. Rates below are the Department of Revenue's tax year 2026 schedule. Brackets are recalculated each year for inflation under Minnesota Statutes section 290.06 and rounded to the nearest $10. The 1 percent tax uses a $1 million line. Confirm both on revenue.state.mn.us before you rely on them. This is not a tax computation.
| Item | Figure we checked |
|---|---|
| Capital-gains preference | None. One schedule for Minnesota taxable income. The individual return starts with federal adjusted gross income, which includes the gain. |
| Rates | 5.35%, 6.80%, 7.85%, and 9.85%. |
| 2026 joint brackets | 5.35% to $48,700. 6.80% from $48,701 to $193,480. 7.85% from $193,481 to $337,930. 9.85% from $337,931 up. |
| 2026 single 9.85% bracket | Taxable income from $203,151 up. Head of household reaches 9.85% from $270,061. Married filing separately, from $168,966. |
| 1% net investment income tax | 1% of net investment income over $1,000,000. Individuals, estates, and trusts. Taxable years beginning after December 31, 2023. The 2026 Schedule NIIT subtracts $1,000,000. The statute does not use a different amount on a joint return. |
| Class 2a land | Net gain on Minnesota class 2a agricultural property is excluded from that 1% tax. Only the acreage the assessor can separate as class 2a. This is not an exclusion for stock or goodwill. |
| Corporate franchise tax | 9.8% as of January 1, 2026, on a C corporation. Separate from the individual brackets. |
| Federal long-term capital gain, 2026 | 20% above taxable income of $613,700 joint or $545,500 single. 15% below that, down to a 0% band at $98,900 joint. IRS Revenue Procedure 2025-32. |
| Federal net investment income tax | 3.8% of the lesser of net investment income or the amount MAGI exceeds $250,000 joint or $200,000 single. Those thresholds are not indexed. |
Under §453, gain is recognized as principal is received. On a $4 million sale with a $400,000 basis, the gain is $3.6 million, a 90 percent gross-profit percentage. Interest on the payments is ordinary income when received and is not part of that percentage. In a structured sale, the payment right is assigned before the seller can collect the buyer's cash. How the assignment works and the §453 walk-through cover the documents. Gain is reported on Form 6252 as payments arrive.
The 2026 Form M1 instructions start with federal adjusted gross income. For a full-year resident, installment gain is in that figure in the year the federal return recognizes it. Those instructions list accelerated recognition of certain nonresident installment sales as a Minnesota addition. A full-year resident does not make that addition and does not file Schedule M1AR. Deferral changes the year. It does not forgive the tax. Later years use the brackets then in effect.
Buyers of a Minnesota S corporation or LLC usually want the assets, or an election taxed as an asset sale, because they want a new basis in equipment and intangibles. A stock sale is more often capital gain to the shareholder. The business-sale strategy guide compares that choice. Installment eligibility follows the asset, not the title on the purchase agreement.
| Piece of the price | What can be spread |
|---|---|
| Inventory and dealer property | Not eligible under §453. A distributor's floor is often this line. |
| Cash-method receivables | Ordinary income, not a goodwill-style deferral. |
| Depreciated equipment | §1245 recapture in the year of sale under §453(i), even if no principal is received that year. Presses, trucks, and excavators land here. |
| Seller noncompete | Often ordinary. The allocation is negotiated. |
| Goodwill | Capital gain that can be spread if the sale qualifies and the holding period is met. |
| Private-company stock | Often eligible. A sale taxed as an asset sale, or a sale of a partnership interest, can pull inventory and receivables back into ordinary income. |
| Class 2a farmland | The land gain can be installment gain. It is also outside the 1% tax. Stock in the operating company is not class 2a land. |
Depreciated equipment in a machine shop or a contractor's yard is ordinary income in the year of sale. Goodwill in a practice often is not. The HVAC, medical, dental, and law and CPA guides cover those allocations. A feed mill or implement dealer in southern Minnesota or the Red River Valley may be selling the company and class 2a ground together. The farmland guide is the land. Section 1031 covers the real property, not the stock, goodwill, equipment, or inventory. A C corporation asset sale is taxed first at the franchise-tax rate in the box. Minnesota's pass-through entity tax does not pay the 1 percent tax, so an owner over $1 million of investment income still files Schedule NIIT.
Illustration only — hypothetical, not a projection and not your return. A married couple sells Minnesota company stock for $4 million. Basis is $400,000, so the gain is $3.6 million. The example leaves out other income, deductions, credits, and interest on the payments. A stock sale adds no depreciation recapture at closing. The same price is in the California and New Jersey articles.
The gross-profit percentage is 90 percent. A lump-sum closing recognizes the entire $3.6 million in the year of sale. Ten equal principal payments recognize one-tenth of that gain in each year. The gain adds up to the same $3.6 million. What changes is the year each slice is recognized. This comparison does not compute the Minnesota or federal tax on either path.
Minnesota taxes recognized gain on the ordinary schedule in the figures box. For 2026 the joint 9.85 percent bracket starts at $337,931 of taxable income. A separate 1 percent tax applies to net investment income over $1 million. A single-year recognition of a gain this size can clear both lines. Whether a payment year does depends on other income that year, and later years use the brackets then in effect. Federal long-term rates are 0, 15, or 20 percent. The 2026 joint 20 percent line is $613,700, and the federal 3.8 percent tax uses a $250,000 joint threshold.
Cash puts the Minnesota tax, including the 1 percent tax if investment income clears $1 million, on one return. Seller financing is also an installment sale, with the buyer still owing the price. An earnout can be added price or wages for staying. A 1031 exchange defers gain on real property bought on time, not on stock or goodwill. A Delaware statutory trust holds replacement real estate. A deferred sales trust is a different arrangement. The strategy comparison, the deferred-sales-trust comparison, and the note on the two DSTs keep the names apart. A monetized installment sale borrows against the note. The IRS article covers that one.
For taxable years beginning after December 31, 2026, Minnesota does not follow a federal opportunity-zone exclusion for the 1 percent tax. The Department's 2026 conformity bulletin describes that change. The opportunity-zone comparison is the federal side.
A move does not, by itself, end Minnesota tax on a pass-through installment sale. For a sale after December 31, 2016 of an interest in, or the assets of, an S corporation or partnership, the Department requires accelerated recognition if the seller is a nonresident at the sale or becomes one while payments continue. Schedule M1AR is the form. An election under section 290.0137 keeps the installment timing, with a Minnesota return each year, sourced under the year-of-sale rules. In the Department's example, S corporation stock sold by a resident stayed sourced to Minnesota after the seller moved.
Full-year residents do not file Schedule M1AR. A sale that is not connected to an S corporation or partnership does not use it either. C corporation stock and a sole proprietor's assets follow the nonresident sourcing chart: installment gain from Minnesota assets or a Minnesota business is assigned to Minnesota, and interest is treated differently from the gain. Goodwill and a covenant connected with a Minnesota business are generally Minnesota-source for a nonresident. Someone who is not a resident all year computes the 1 percent tax as a resident, then applies the Minnesota share of net investment income. The Wisconsin and North Dakota guides cover owners who live there. Do not plan a move from this article.
It fits a retiring owner who can live on a schedule, whose eligible gain is large next to inventory and recapture, and who would otherwise put more than $1 million of investment income into one year at 9.85 percent. It fits poorly when the price is mostly ordinary income, the lender must be paid at closing, or the payments are wages. The retirement-income article starts from the paycheck. The schedule has to be fixed before the seller can collect.
No. Minnesota has one graduated schedule for taxable income. For 2026 the top rate is 9.85 percent on taxable income over $337,930 joint or $203,150 single. A separate 1 percent tax applies to net investment income over $1 million. The gain is in federal adjusted gross income, which is where the Minnesota return starts.
Inventory and dealer property are outside section 453. Depreciation recapture is recognized in the year of sale under section 453(i). Cash-method receivables and many noncompete payments are ordinary income. Goodwill and qualifying stock can be spread when the sale qualifies. Net gain on Minnesota class 2a agricultural land is excluded from the 1 percent tax, and that exclusion is not a goodwill or stock exclusion.
Not as a rule, and the entity matters. For a sale after 2016 of an interest in, or the assets of, an S corporation or partnership, Minnesota requires accelerated recognition if you are a nonresident at the sale or become one while payments continue, unless you elect to defer under section 290.0137 and keep filing Minnesota returns. In the Department of Revenue's example, S corporation stock sold while a resident stays sourced to Minnesota after the move. Do not plan a move from this article.
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