An MR element includes a first exchange coupling shield layer, an MR stack, and a second exchange coupling shield layer that are arranged in this order from the bottom, and a nonmagnetic layer surrounding the MR stack. The MR stack includes a first free layer, a spacer layer, a second free layer, and a magnetic cap layer that are arranged in this order from the bottom. In the step of forming the MR stack and the nonmagnetic layer, a protection layer is formed on a layered film that will be the MR stack later, and a mask is then formed on the protection layer. Next, the layered film and the protection layer are etched using the mask and then the nonmagnetic layer is formed. After removal of the mask, the protection layer is removed by wet etching.