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.
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 2018
For 2018, Minnesota’s capital gains tax rate was 5.35 percent for single filers up to $25,890 and up to $37,850 for married couples filing jointly; 7.05 percent for single filers up to $85,060 and up to $150,380 for married couples filing jointly; 7.85 percent for single filers up to $160,020 and $266,700 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, changes the way long-term capital gains taxes are computed for federal purposes. For 2018, the federal capital gains tax is 0 percent for single filers with adjusted gross incomes up to $38,600 and for married couples filing jointly up to $77,200; 15 percent for single filers up to $425,800 and up to $479,000 for married couples filing jointly, and 20 percent for single filers and married couples filing jointly whose income is above the 15 percent limit.
Minnesota Tax Brackets 2017
For 2017, Minnesota’s capital gains tax rate was 5.35 percent for single filers up to $25,390 and up to $37,110 for married couples filing jointly; 7.05 percent for single filers up to $83,400 and up to $147,450 for married couples filing jointly; 7.85 percent for single filers up to $156, 900 and $261,510 for married couples filing jointly and 9.85 percent for single filers and married couple filing jointly earning more than the limits of the 7.85 percent tax bracket.
For 2017, the federal long-term capital gains rate is 0 percent for those under the 25 percent tax bracket, 15 percent for those in the 25 percent but under the 39.6 percent tax bracket, and 20 percent for those in the 39.6 percent tax bracket.
- IRS: Property (Basis, Sale of Home, etc.)
- Ward & Loehler Ltd.: Estate and Gift Tax Update for 2017
- Nolo: Best Practices for Giving Money or Property as Gifts
- Montana State University: Gifting: A Property Transfer Tool of Estate
- Minnesota Legislature: Capital Gains Taxation: Federal and State
- MN Department of Revenue: Minnesota Income Tax Rates and Brackets
- Chernoff Diamond: 2018/2017 Federal Capital Gains and Dividends Tables
- Maria Teijeiro/Digital Vision/Getty Images