If you were gifted a piece of Minnesota in the form of property, capital gains taxes are due when you sell the property. When gifts exceed the amount of the federal gift tax exclusion, it is the donor who must pay that tax, not the recipient of the gift, but the capital gains tax is all yours to pay.
You can expect to pay Minnesota capital gains tax when you sell a gifted property. Federal capital gains tax can also apply.
Determining Tax Basis
When a person makes a gift of land to another person, the tax basis for the property is the same for the donor as it is for the recipient. If a parent gives a child real estate worth $200,000, that’s what the child’s tax basis is considered. If the land goes up in value but is undeveloped, the basis does not change. However, if the child makes improvements on the property, such as building a home, the improvements are added to the basis.
If she sells the home years later for $400,000, her basis is $200,00 plus the cost of improvements. If she put $150,000 into the property for home construction, her basis is $350,000 and she will owe capital gains tax on $50,000. If she turned around and sold the gift property not long after receiving it for $200,000, she would not owe capital gains tax.
Federal tax on capital gains depends on when she sold the property. If she held on to it for less than one year, any capital gains are taxed as ordinary income. If she sold it more than a year later, the capital gains are considered long-term and taxed at a lower rate than short-term gains. However, if she built a house on the property and lived in it as her primary residence for at least two of the past five years prior to selling, she can exclude up to $250,000 in capital gains if single and $500,000 if married and filing jointly.
Minnesota Capital Gains Tax
The capital gains tax in Minnesota subjects all net capital gains to taxes applied at the same rate as other income. Minnesota doesn’t have a gift tax, but if a gift was made within three years of a person’s death, it may be included in their gross estate. If the gift tax is included in the estate, any gift tax paid by the late individual or their spouse is included in the estate for the purpose of federal estate tax calculation.
Minnesota and Federal Tax Brackets 2019
For 2019, Minnesota’s capital gains tax rate is 5.35 percent for single filers up to $26,520 and up to $38,770 for married couples filing jointly; 7.05 percent for single filers up to $87,110 and up to $154.020 for married couples filing jointly; 7.85 percent for single filers up to $163,890 and $273,150 for married couples filing jointly and 9.85 percent for single filers and married couples filing jointly earning more than the limits of the 7.85 percent tax bracket.
The Tax Cuts and Jobs Act, signed into law on Dec. 22, 2017, changed the way long-term capital gains taxes are computed for federal purposes. For 2019, the federal capital gains tax is 0 percent for single filers with adjusted gross incomes up to $39,375 and for married couples filing jointly up to $78,750; 15 percent for single filers up to $434,550 and up to $488,850 for married couples filing jointly, and 20 percent for single filers and married couples filing jointly whose income is above the 15 percent limit.
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Financial Advisor, Sapling, nj.com and The Nest.