1031 Exchange in Montana: Deferred-Gain Tracking, Capital Gains Rates, DSTs

Montana defers the gain with your federal return, then keeps a claim on it

Montana does not tax the gain on a properly completed exchange in the year of sale. The Department of Revenue's own rule, ARM 42.2.308, says gain on Montana real property must be reported 'if and when the gain is recognized for federal income tax purposes', so the state's deferral runs on the federal clock described in what a 1031 exchange is.

The same rule adds a sentence that matters more: gain realized on Montana property 'retains its Montana source income character'. If you exchange a Bozeman fourplex for a building in Arizona and later sell that building in a taxable sale, the Montana portion of the gain becomes reportable to Montana in that later year, even if you no longer live here.

Two limits soften this. The Montana-source amount recognized can never exceed the gain recognized federally, and if the Montana property was itself replacement property for something outside the state, the gain deferred from that earlier exchange is not Montana-source.

• Residents already report all income to Montana, so the rule changes nothing until you become a nonresident.
• Keep every Form 8824 in the chain; the rule's worked examples compute the Montana share from those figures.
• Report the deferred Montana gain on a nonresident Montana Form 2 for the year the federal gain is recognized.

What Montana charges on boot or a failed exchange: 3.0% and 4.1% on long-term gains

Recognized long-term gain is taxed under Montana's separate capital gains table in MCA 15-30-2103: 3.0% on the first $47,500 for a single filer or $95,000 for a joint return, and 4.1% above that, for tax year 2026. Head-of-household filers use a $71,250 threshold.

The lower bracket is reduced by your 'nonqualified taxable income', meaning ordinary income fills the bracket first. A joint filer with $95,000 of wages and a $200,000 recognized gain would see the whole gain taxed at 4.1%.

Ordinary income, including short-term gain on property held a year or less, is taxed at 4.7% and 5.65% on the same thresholds. From January 1, 2027 the thresholds rise to $65,000 single and $130,000 joint, the top ordinary rate drops to 5.4%, and the 3.0% and 4.1% capital gains rates stay.

No transfer tax and no closing withholding, but the Realty Transfer Certificate is mandatory

Montana levies no deed or realty transfer tax and has no statute that withholds state income tax at closing from resident or nonresident sellers. What the county clerk and recorder does require before recording any deed is a completed Realty Transfer Certificate, Form RTC, under MCA 15-7-304, 15-7-305 and 15-7-310.

The RTC is the state's enforcement tool. It carries a printed warning that any gain on the transfer is Montana source income, asks for the last four digits of each seller's Social Security number, and the Department of Revenue cross-matches those numbers against income tax returns to verify that gains from real estate sales were reported.

Filing an inaccurate or incomplete RTC can bring a $500 penalty, six months in jail, or both. The sale price you enter is confidential and is used for property assessment, not published with the deed.

• Part 2 asks whether the property was the seller's principal residence for at least seven months, which is the homestead test.
• A deferred exchange still needs an RTC on the relinquished deed and, if the replacement is in Montana, on that deed too.

Ranch and irrigated land exchanges: the water-right disclosure rides on the same form

Part 7 of the RTC is a water right disclosure the seller must sign whenever the parcel has DNRC water rights. The seller checks one of four boxes: public water supply, no water rights on record, all rights transferring, or rights being divided or severed.

If rights transfer, DNRC Form 608 updates ownership; if they are divided or severed, Form 640 must be signed by seller, buyer and escrow agent before the deed can be recorded, followed by Form 641, 642 or 643. A deed that is silent passes the water rights with the land by operation of law.

For an investor exchanging out of agricultural land, this is a pre-listing task: confirm the DNRC water right numbers and adjudication status before the 45-day identification period starts, because a recording delay at the courthouse can push the relinquished closing.

2026 property tax rates favor long-term rentals and penalize second homes and short-term rentals

House Bill 231 and Senate Bill 542 from the 2025 session rebuilt Montana's residential rates for 2026. Homes that qualify as a homestead or a long-term rental pay tiered rates: 0.76% on the first $378,000 of market value, 0.90% to $756,000, 1.10% to $1,511,999 and 1.90% above.

Residential property that does not qualify, which the Department of Revenue lists as second homes, short-term rentals such as VRBO and Airbnb cabins, and vacant residential lots, pays a flat 1.90%. A rental qualifies for the lower tiers only if it is rented to tenants for 28 or more days at a time and for at least seven months of the year.

Commercial and industrial property pays 1.50% below $2,274,000 of value and 1.90% above. Qualified agricultural land is rated at 2.05% and non-qualified agricultural land at 14.35%.

• The application window for the 2027 tax year homestead and long-term rental rate runs May 4, 2026 to March 1, 2027.
• An out-of-state owner's Montana rental qualifies on use, not on the owner's residence.
• A short-term rental you plan to exchange out of carries the 1.90% rate until it sells.