State Millionaire Surtaxes on Real Estate Gains

These taxes hit sellers because one sale turns an ordinary year into a $1 million year

Most owners who pay a millionaire surtax are not millionaires every year. A rental bought decades ago, with a low basis and years of depreciation, can produce a seven-figure gain in the year it sells, and every one of these thresholds is measured on a single year's income.

The thresholds differ in what they measure. Massachusetts and California look at taxable income, which includes the gain. Minnesota looks only at net investment income, which uses the federal definition and so includes rental gains. New Jersey and the District of Columbia simply have a top bracket that starts at $1,000,000. For the state-by-state list of special rates, see states with capital gains surtaxes.

The rules in each state, with the 2026 figures where published

Each of these applies to residents on all income and to nonresidents on income sourced to the state, which includes gain on real property located there. The state pages carry the withholding and transfer tax detail.

• Massachusetts: the Department of Revenue applies 4% to taxable income over $1,107,750 for 2026 and $1,083,150 for 2025, counting long-term capital gains, and requires couples who file jointly for federal purposes to file jointly for Massachusetts. See Massachusetts.
• California: section 17043 of the Revenue and Taxation Code adds 1% on taxable income over $1,000,000, in addition to the ordinary schedule that reaches 12.3%. See California.
• Minnesota: section 290.033 adds 1% on net investment income of individuals, estates and trusts over $1,000,000 and excludes gain on class 2a agricultural land. See Minnesota.
• New Jersey: the NJ-1040 instructions apply 10.75% to taxable income over $1,000,000 in both the single and joint tables. See New Jersey.
• District of Columbia: the Office of Tax and Revenue applies 10.75% to taxable income over $1,000,000.

Worked example: a $1,500,000 gain in Massachusetts and in California

Hypothetical, round figures, ignoring deductions and credits. A single seller with $150,000 of other income sells a rental in 2026 with a $1,500,000 long-term gain, so state taxable income is about $1,650,000.

In Massachusetts, the surtax is 4% of the $542,250 above $1,107,750, or $21,690, on top of the 5% tax on the whole income. In California, the extra 1% applies to the $650,000 above $1,000,000, adding $6,500 to tax at ordinary rates that already reach 12.3%.

If the Massachusetts seller instead received the gain evenly over two years through an installment sale, each year's taxable income would be about $900,000 and no surtax would apply, a saving of about $21,690 before weighing the buyer's credit risk and interest. Run your own numbers with your CPA.

Spreading the gain works only if the rules let it, and Massachusetts says how

An installment sale under section 453 reports gain as payments arrive, which can keep each year under a threshold. The Massachusetts Department of Revenue confirms that installment sale income counts toward the surtax in the year Massachusetts includes it under its own installment rules, so spreading works there as it does federally.

Spreading has limits. Section 453(i) requires recapture income, the part of the gain treated as ordinary under section 1245 or 1250, to be recognized in the year of sale even on an installment note, so cost-segregated property front-loads income; the buyer must be creditworthy, and a note to a related buyer resold within two years accelerates the gain. 1031 versus an installment sale compares the two in detail.

Closing in early January rather than late December moves the whole gain into the next tax year, which helps when the other year's income is unusually high, but it does not split the gain.

Harvesting losses works in the other direction. Capital losses from other investments that offset the gain in the sale year reduce the income measured against the threshold, though Massachusetts treats a negative part of its return as zero when adding the parts together. Minnesota's tax follows the federal net investment income definition, so losses that reduce that figure reduce it too.

An exchange defers the surtax along with the gain

These states start from federal income and generally follow the section 1031 deferral, so a full exchange keeps the gain out of taxable income for the year and no surtax applies. A partial exchange that leaves boot can still cross the line if the boot is large. Some states track deferred gain when the replacement property is out of state; does a 1031 defer state capital gains tax covers the claw-back rules.

Replacement property can be a fractional interest in a traditional DST, which lets a seller defer the full gain without buying another building to manage. 1031 planning for high-income owners puts the federal and state layers together.