Montana Capital Gains Tax, Explained

Most states either tax capital gains as ordinary income with no discount, or run a percentage exclusion off the top. Montana does neither. Under Mont. Code Ann. 15-30-2103, net long-term capital gain, gain on an asset held more than one year, as defined by IRC section 1222, gets its own rate table entirely: 3.0% on the first bracket and 4.1% above it. Short-term gains get no such table; they're ordinary income, full stop.

Montana's 2025 tax reform, House Bill 337, rewrote the ordinary income brackets for tax years 2026 and 2027, widening the lower bracket and cutting the top rate. For 2026, ordinary income is taxed at 4.7% up to $47,500 (single/married filing separately), $71,250 (head of household), or $95,000 (married filing jointly), then 5.65% above those thresholds. HB 337 left the capital gains rate structure itself untouched, it kept the 3.0%/4.1% schedule and simply aligned the bracket thresholds to match the new ordinary-income numbers.

Worked example: a single filer with wages already well above $47,500 sells an asset held two years for a $150,000 long-term gain. That gain lands in the 4.1% bracket, so Montana tax on the sale is $6,150. If that same $150,000 were ordinary income instead (a short-term gain, or a bonus), it would land in the 5.65% bracket, for $8,475, a difference of $2,325 just for holding the asset past one year.

Montana simplified its individual income tax structure for tax years 2026 and 2027 through House Bill 337. The reform widened the bottom bracket (more income taxed at the lower ordinary rate before hitting the top rate) and reduced the top ordinary rate itself, from prior-law levels down to 5.65% for 2026 and 5.4% for 2027. The bill also raised Montana's earned income tax credit to 20% of the federal EITC starting in 2026.

For capital gains specifically, the headline is what didn't change: the 3.0%/4.1% preferential rate structure under Mont. Code Ann. 15-30-2103 stayed in place. Sellers who assumed the reform collapsed Montana onto a single flat rate for everything, gains included, are working from the wrong number. The gap between ordinary and long-term capital gains rates is real going into 2026 and narrows only slightly with the 2027 ordinary-rate cut.

Montana's reduced rate only ever touches the state return. The federal government taxes the same gain under its own rules: 0%, 15%, or 20% for long-term gains depending on your bracket, ordinary rates up to 37% for short-term gains, and the 3.8% net investment income tax layered on above $200,000 MAGI (single) or $250,000 (married filing jointly).

Put the two systems together and a high-income Montana seller's true all-in rate on a long-term gain runs roughly 20% federal (15% or 20% LTCG plus 3.8% NIIT) plus about 3.0% to 4.1% state, landing somewhere near 24% to 28% combined. A short-term gain at the top of both systems, ordinary federal rates up to 37% plus the 3.8% NIIT plus Montana's uncushioned 5.65%, can run closer to 46%.

Everything that reduces the federal gain, loss harvesting, timing a sale into a lower-income year, or an installment sale that spreads income across years, reduces the Montana number in the same motion, since Montana's rate schedule applies to whatever net long-term gain shows up on the federal return.

This is where rental and farm-building sellers trip up. Montana's 3.0%/4.1% schedule applies to net long-term capital gain as IRC section 1222 defines it, and that federal definition already carves out amounts treated as ordinary income because of depreciation recapture. Practically: the depreciation you claimed on a rental comes back as recapture, taxed federally at up to 25% (unrecaptured Section 1250 gain) and by Montana at the full 4.7%/5.65% ordinary rate, not the reduced capital gains schedule.

Worked example: you sell a rental for a $200,000 total gain, of which $60,000 is depreciation recapture and $140,000 is appreciation, and you're in the top federal and Montana brackets. Federal: $60,000 x 25% = $15,000, plus $140,000 x 15% (assumed federal LTCG bracket) = $21,000. Montana: the $60,000 recapture is taxed at the ordinary 5.65% rate = $3,390; the $140,000 appreciation gets the long-term rate at 4.1% = $5,740. Montana total: $9,130. Only the appreciation slice, not the recapture, ever sees the 3.0%/4.1% schedule.

See our depreciation recapture calculator to model the split before you list.

Montana's ranch country, mountain towns, and lake properties draw a steady stream of out-of-state buyers, and eventually, sellers. The rule that catches people off guard: Montana real property is Montana-source income no matter where the owner lives when the sale closes. A Colorado or California resident who owns a Montana ranch or cabin still files a Montana nonresident return and pays Montana tax, at the same 3.0%/4.1% long-term rates, on the gain.

The federal Section 121 exclusion ($250,000 single, $500,000 married filing jointly) only applies if the property was your primary residence for two of the last five years. A second home, hunting cabin, or ranch used seasonally doesn't qualify, which means the full gain, appreciation that in Montana's high-demand recreational-property markets can be substantial, is exposed to Montana's rate schedule and the federal 0/15/20% brackets with no exclusion cushion.

Considering converting a Montana second home into your primary residence before selling, or holding a ranch as a working operation versus a personal retreat? Those decisions change both the federal exclusion analysis and how the sale gets characterized. See Should You Sell or Rent Your House? for the framework, and get the Montana-specific numbers modeled before a listing goes live.