If you are a homeowner in the Great Lake State, you may have questions on how to prepare to sell your home to a potential buyer. We provide an in-depth analysis of the tax implications for individuals selling their homes, covering topics such as capital gains tax, transfer tax, potential exemptions and deductions, and the rules or regulations that apply specifically to Michigan residents.
Do You Pay Capital Gains Tax When Selling a Home in Michigan?
According to Michigan legislation (MCL 141.626), both capital gains and losses are included in a taxpayer’s income. When a Michigan resident sells a home or a capital asset and realizes a capital gain on the sale in Michigan, the state government treats the gains as income.
The 4 Levels of Michigan Taxes on Real Estate
Michigan homeowners pay taxes to multiple government entities when selling their homes, apartments, condos, or other real estate property. Home sales in Michigan involve four layers of taxes: federal capital gains taxes, state income taxes, state transfer taxes, and county transfer taxes.
Federal Capital Gains Taxes
Rate: Varies from 0% to 20%, depending on the taxpayer’s situation. The most common rate is 15%.
As in all other states, if you sell real estate in Michigan, you must pay federal capital gains taxes.
The IRS defines two types of capital gains: short-term and long-term. It is considered a short-term capital gain if you have owned the property for one year or less before selling it. If you’ve held it for over a year, it is a long-term capital gain instead.
Short-term capital gains are taxed as ordinary income, meaning the tax brackets for this type of gain are identical to those for standard federal income taxes.
Long-term capital gains tax brackets are calculated based on the seller’s filing status and income levels:
- 0% for taxpayers meeting the following conditions:
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- The taxpayer’s filing status is “Single” or “Married Filing Separately” and their taxable income of $41,675 or less
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- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income of $83,350 or less
- The taxpayer’s filing status is “Head of Household” and their taxable income of $55,800 or less
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- 15% for taxpayers meeting the following conditions:
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- The taxpayer’s filing status is “Single,” and their taxable income is over $41,675 but $459,750 or less
- The taxpayer’s filing status is “Married Filing Jointly” or “Qualifying Surviving Spouse,” and their taxable income is over $83,350 but $517,200 or less
- The taxpayer’s filing status is “Married Filing Separately,” and their taxable income is over $41,675 but $258,600 or less
- The taxpayer’s filing status is “Head of Household,” and their taxable income is over $55,800 but $488,500 or less
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- 20% for taxpayers exceeding the maximum thresholds outlined for each respective filing status in the 15% category (e.g., taxpayer filing as single and earning over $459,750)
Paragraph 121 of the Internal Revenue Code (IRC) outlines exceptions to long-term capital gains taxes. Sellers can exclude up to $250,000 (or $500,000 for married couples filing jointly) on the gains realized following the sale of their home if they pass the “ownership and use tests.” You qualify for this exclusion if:
- The house sold was your primary residence
- You owned the home for two years or more
- You lived in the home and used it as your primary address for two years or more
How is the Federal Capital Gains Tax Calculated?
According to the National Association of Realtors, the median period of homeownership in the United States is 13 years. While the exact duration varies by area, it typically falls between 6 and 21 years. These stats show that most individuals selling a home in the United States will pay long-term federal capital gains taxes.
Example: Valerie is a single taxpayer with an annual income of $157,000. She purchased a condo in Lansing, MI, five years ago for an initial purchase price of $295,000. She then used it as her primary residence for the last three years before selling it for $431,000. Due to the difference between the sale and initial purchase prices, Valerie realized a capital gain of $136,000. The length of homeownership exceeds one year, meaning the IRS categorizes this gain as long-term.
Valerie’s filing status and annual income place her in the 15% tax bracket and require her to pay $20,400 in capital gains taxes at the federal level. However, IRC Paragraph 121 outlines an exemption for selling primary homes, allowing single taxpayers to exclude up to $250,000 of capital gains from the federal tax. Valerie passed the two-year ownership and use tests, meaning she can benefit from this exemption and exclude 100% of the gains she realized from the federal capital gains taxes.
Michigan State Capital Gains Tax
Rate: 4.05% for Tax Year 2023, 4.25% for Tax Year 2022
Michigan taxes all capital gains realized in the state as income, subjecting them to the standard individual income tax schedule. The individual income tax rate in Michigan is flat, meaning it effectively has only one bracket.
Since the passage of the Income Tax Act, the rate has been reduced from 4.25% to 4.05%, effective January 1, 2023. Consequently, any capital gains realized in the state are subject to this rate.
How is the Michigan State Capital Gains Tax Calculated?
The Michigan Department of Treasury treats capital gains as individual income. When a Michigan taxpayer realizes a capital gain during the tax year, the amount is added to their annual income. The state then taxes the total.
Example: Valerie files is single and earns $157,000 annually. Under ordinary circumstances for Tax Year 2023, the state’s individual income tax rate of 4.05% means Valerie would owe $6,358.50 in income taxes. However, when she realized a capital gain of $136,000 on the sale of her Lansing condo, her annual income increased by that amount, so Valarie is taxed as though she earned $293,000, meaning she must pay $11,866.50 in income taxes.
Michigan State Transfer Taxes
Rate: $3.75 per $500 (0.75%)
In addition to taxing capital gains as income, the Michigan Department of Treasury also levies the State Real Estate Transfer Tax (SRETT) on all transfers of property within the state’s borders from one party to another. The SRETT tax rate is $3.75 for every $500 or fraction thereof in the consideration, equivalent to about 0.75%. The seller usually is responsible for paying the transfer tax unless the parties to the sale agree to a different arrangement.
How is the Michigan State Transfer Tax Calculated?
Like most transfer taxes in other states, the Michigan State Real Estate Transfer Tax (SRETT) taxes a portion of the property’s fair market value at the time of sale.
Example: When Valerie sold her condo in Lansing, MI, the final sale price negotiated for the property was $431,000. The State Real Estate Transfer Tax (SRETT) taxes at a rate of $0.75 per $500, or in this case, $646.50. There was no agreement to split the SRETT between the buyer and herself, so Valerie paid the transfer tax after selling the house.
Michigan County Transfer Taxes
Rate: $0.55 per $500 (0.11%)
Besides the state-level State Real Estate Transfer Tax (SRETT), each of the 83 counties in Michigan is authorized to levy an additional county-level transfer tax. The county-level transfer tax rate is the same in every Michigan county, at $0.55 per $500. Like the SRETT, paying the county transfer tax is typically the seller’s responsibility unless otherwise agreed upon.
How is the Michigan County Transfer Tax Calculated?
County-level transfer taxes in Michigan are calculated using the same method as the SRETT. The amount taxed depends on the property’s fair market value at the time of sale.
Example: Valerie’s Lansing, MI, condo is located in Ingham County. When she sold the property for $431,000, she owed transfer taxes to the county in addition to the state-level SRETT. According to the Ingham County Register of Deeds website, the county transfer tax rate is $1.10 per $1,000, equal to $0.55 per $500. Consequently, she owes Ingham County $474.10.
Michigan Exemptions and Deductions for Real Estate Taxes
Under ordinary circumstances, property transfers in Michigan are subject to state and county transfer taxes, and any capital gains realized during a sale are taxed as income.
However, specific exemptions and deductions outlined within Michigan law can help you reduce your tax burden when selling a home in the Great Lake State.
Below is a list of exemptions and deductions to these taxes within Michigan law.
Michigan Transfer Tax Exemptions
Michigan law (MI Compiled Laws 207.505) outlines a list of situations and transfers exempt from the state’s transfer taxes.
1. Low-Value Considerations
Per Michigan law, any transfer of property where the value in the consideration is $100 or less is exempt from the State Real Estate Transfer Tax (SRETT).
2. Partially Out-of-State Transfers
According to MCL 207.505(b), any transfers of property that are partially located outside the state are exempt from the SRETT “only to the extent the written instrument includes land lying outside of this state.” For example, in the case of a property straddling state lines, the Michigan state transfer tax only applies to the portion of land on the Michigan side of the line.
3. Federally Exempt Transfers
Any transfers exempt from taxation due to federal law is also exempt from the State Real Estate Transfer Tax (SRETT).
4. Securities and Security Interests
Transfers of property by way of security, such as mortgages, are exempt from the state’s transfer tax.
5. Lease Transfers
Properties transferred due to a lease or transfer of an interest in a leasehold are exempt from the SRETT. The exemption also applies to oil and gas leases.
6. Property Assessable as Personal Property
Transfers of real estate property assessed as personal property are exempt from the state’s transfer tax. A typical example is the transfer of a mobile home. If attached to land or permanent fixtures, Michigan may consider a mobile home real property. However, if a transfer only includes the mobile home, without the land and fixtures, it may be assessed as personal property.
7. Underground Gas Storage
Transfers of titles and deeds for property used to store gas underground are explicitly exempt from the SRETT.
8. Transfers To and From Government Entities
Transfers of real estate property may be exempt from the state transfer tax if it meets any one of the following criteria:
- The grantor in the transfer is the United States, the state of Michigan, a political subdivision or municipality of Michigan, or an officer thereof acting in their official capacity.
- A transfer in foreclosure or in lieu of foreclosure of a loan insured, made, or guaranteed by the United States, Michigan, a political subdivision or municipality of Michigan, or an officer thereof acting in their official capacity.
- The transfer is under the terms, guarantee, or insurance of a loan insured or guaranteed by the grantee, AND the grantee in the transfer is the United States, the state of Michigan, a political subdivision or municipality of Michigan, or an officer thereof acting in their official capacity.
9. Transfers Between Spouses
Conveyances from an individual to their spouse or from a spouse or two spouses jointly creating or disjoining a tenancy are exempt from the SRETT.
10. Transfers to Children and Grandchildren
Conveyances from an individual to their child, stepchild, adopted child, grandchild, step-grandchild, or adopted grandchildren are exempt from the State Real Estate Transfer Tax (SRETT).
11. Court Orders
Court-ordered property transfers are generally exempt from the SRETT unless the court specified or ordered a monetary consideration for the transfer.
12. Straightened Boundary Lines
Any property transfers completed due to the straightening of a property’s boundary lines are exempt from the state’s transfer tax if no monetary consideration is involved.
13. Land Contracts
Transfers of land contracts where the legal title isn’t transferred to the grantee until 100% of the consideration has been paid are exempt from the SRETT.
14. Business and Corporate Transfers
Transfers of business and corporate real estate property are exempt from the Michigan state transfer tax if it meets any one of the following conditions:
- The transfer is from a corporation, LLC, partnership, or trust to any of its creditors, stockholders, members, partners, or beneficiaries (as applicable), AND the transfer was executed to dissolve the corporation, LLC, partnership, or trust
- The transfer is from an LLC to its members if the LLC’s ownership interests are held by the same individuals and in the same proportions before the transfer
- The transfer is from a partnership to its partners if the partnership’s ownership interests are controlled by the same individuals and in the same proportions before the transfer
- Transfers following the reorganization of a business or corporate entity, with no changes to beneficial ownership
- Transfers of controlling interests in an entity with interest in any type of real estate property if the transfer of that property would have qualified for an exemption between the parties to the transfer
15. Mineral Rights Deeds
Transfers of deeds and other documents for mineral rights and interests are exempt from the SRETT.
16. Joint Tenancies
Transfers executed to create a joint tenancy between two or more individuals are exempt from the state’s transfer tax if one of these individuals already owns the property.
17. Mortgage Foreclosures
Transfers of property pursuant to a mortgage foreclosure, including documents given in lieu of foreclosure, are exempt from the state’s transfer tax. However, the exemption does not apply to any subsequent transfers of the foreclosed property by the foreclosing entity.
18. Transfers Between Religious Societies
Transfers of real property from a valid tax-exempt religious property to another valid tax-exempt religious property are exempt from the State Real Estate Transfer Tax (SRETT) if the property continues to meet the state’s conditions for tax exemption outlined in MCL 211.7s.
Michigan Real Estate Taxes vs. Other States
Although Michigan’s real estate taxation system features four layers, the state taxes capital gains as income at a flat rate, making it one of the least expensive states for homeowners to sell real estate. Below is a breakdown of real estate taxes in similar states and how they compare with Michigan.
North Carolina
Real estate taxes in North Carolina are near the national average. Most residents can expect to pay federal capital gains taxes, state income taxes, and state transfer taxes. Specific counties may impose additional transfer taxes.
Capital Gains Tax Rate: 4.75% for Tax Year 2023, 4.99% for Tax Year 2022
Capital gains realized in North Carolina are taxed as income, similar to Ohio. According to the North Carolina Department of Revenue (NCDOR), the state levies a flat individual income tax rate subject to frequent readjustments, typically yearly or biyearly. For Tax Year 2022, the income tax rate was 4.99%. The state changed the rate to 4.75% for Tax Year 2023.
Transfer Tax Rate: 0.2%
According to the North Carolina General Statutes (Sections 105.228.28, 29, and 30), the state collects a tax on property transfers called the Excise Tax on Conveyances. The rate is $1 per $500 or fraction thereof in the final consideration amount, or about 0.2%.
New Jersey
Depending on your income and the capital gains realized, New Jersey’s real estate taxes can be among the most expensive in the nation.
Capital Gains Tax Rate: 1.40% – 10.75%
According to the New Jersey Treasury Division of Taxation, the state taxes capital gains as income using a progressive tax bracket system.
Review New Jersey’s income tax brackets as the state’s tax bracket system will vary significantly depending on your income and filing status.
Transfer Tax Rate: $0.50 per $500 (0.1%) – $6.05 per $500 (1.21%)
New Jersey levies the Realty Transfer Fee on real property transfers within the state’s borders.
The rates vary depending on the consideration amount, whether the property qualifies as low and moderate income housing, and whether the transfer’s grantee is a qualifying senior citizen or a blind or disabled person.
Transfer tax rate schedule for standard transfers with a total consideration of $350,000 or less in New Jersey:
- If the consideration amount is $150,000 or less, the transfer tax is $2 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $150,000 but $200,000 or less, the transfer tax is $3.35 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $200,000 but $350,000 or less, the transfer tax is $3.90 per $500 or fraction thereof in the consideration amount.
Transfer tax rate schedule for standard transfers with a total consideration of over $350,000 in New Jersey:
- If the consideration amount is $150,000 or less, the transfer tax is $2.90 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $150,000 but $200,000 or less, the transfer tax is $4.25 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $200,000 but $550,000 or less, the transfer tax is $4.80 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $550,000 but $850,000 or less, the transfer tax is $5.30 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $850,000 but $1,000,000 or less, the transfer tax is $5.80 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $1,000,000, the transfer tax is $6.05 per $500 or fraction thereof in the consideration amount.
Transfer tax rate schedule for transfers to senior citizens, blind or disabled persons, or for properties classified as Low and Moderate Income Housing in New Jersey:
- If the consideration amount is $150,000 or less, the transfer tax is $1.40 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $150,000 but $550,000 or less, the transfer tax is $2.15 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $550,000 but $850,000 or less, the transfer tax is $2.65 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $850,000 but $1,000,000 or less, the transfer tax is $3.15 per $500 or fraction thereof in the consideration amount.
- If the consideration amount is over $1,000,000, the transfer tax is $3.40 per $500 or fraction thereof in the consideration amount.
Virginia
Virginia’s real estate taxation schedule is near the national average.
Capital Gains Tax Rate: 2% – 5.75%
Virginia treats capital gains realized in the state as individual income. According to the Virginia Department of Taxation, four tax brackets apply:
- If the total Virginia taxable income is $3,000 or less, the state income tax is 2%.
- If the total Virginia taxable income is over $3,000 but $5,000 or less, the state income tax is $60 + 3% of the excess over $3,000.
- If the total Virginia taxable income is over $5,000 but $17,000 or less, the state income tax is $120 + 5% of the excess over $5,000.
- If the total Virginia taxable income is over $17,000, the state income tax is $720 + 5.75% of the excess over $17,000.
Transfer Tax Rate: 0.2%
Virginia levies the State Recordation Tax on all property transfers within the Commonwealth, except as exempted by law. According to the Code of Virginia, the State Recordation Tax is $0.25 for every $100 or a fraction thereof in the consideration amount (VA Code 58.1-801).
When Do You Pay Capital Gains Tax on Michigan Real Estate?
In Michigan, you are required to pay capital gains tax on real estate when you sell a property and make a profit from the sale. Capital gains tax applies to the difference between the original purchase price of the property (plus any improvements) and the final selling price. The tax is levied on both state and federal levels.
Short-Term vs. Long-Term Capital Gains Tax Rate in Michigan
Capital gains tax rates vary depending on your income and how long you’ve held the property. According to the IRS, short-term capital gains (property held for one year or less) are taxed at the federal level at your ordinary income tax rate, while long-term capital gains (property held for more than one year) are taxed at a lower rate, which can be 0%, 15%, or 20% depending on your income.
In addition to federal capital gains taxes, you’ll also have to pay Michigan state income tax on the capital gains from the sale of real estate. Michigan’s state income tax rate is a flat 4.05% for Tax Year 2023.
Although Michigan legislation taxes capital gains as individual income, the state recognizes the difference between short-term and long-term capital gains and requires taxpayers to report both explicitly. Michigan Form MI-8949 includes sections allowing taxpayers to report short-term and long-term capital gains and losses.
How to Avoid Capital Gains Taxes on Home Sale in Michigan
Individuals looking to sell a home in Michigan and reduce their tax liability on capital gains can use the following strategies:
Strategy #1: Federal Exclusion of Long-Term Capital Gains
According to the IRS, you can exclude up to $250,000 (or $500,000 if married and filing jointly) of the gains realized from the sale of a home, provided the home was your primary residence. You can prove your home was a primary residence by passing the ownership and use tests, which require you to pass the following:
- Ownership test: You have owned the home for at least two years before the sale. Documents such as a deed and title insurance may constitute valid proofs of ownership.
- Use test: You must show proof of occupancy, meaning you have lived in the home and used it as your primary residence for at least two years before the sale. Documents used to prove occupancy are outlined in federal proof of occupancy guidelines.
Although it is not required for the ownership and usage periods to be consecutive, you must be able to prove both ownership and use of the home within five years of the sale. Additionally, you must not have used this exclusion for another home in the last two years.
Example: Jamie is a single taxpayer living in Dearborn, MI. Four years ago, he purchased a single-family home for $160,000. He used the house as his primary residence immediately after purchasing it, meaning his homeownership and use periods are the same, at four years. He eventually sold the house for $200,000, realizing a long-term capital gain of $40,000.
As a taxpayer filing as single, IRC Section 121 allows Jamie to exclude up to $250,000 of the capital gains he realized from taxation. He submits valid documentation to the IRS showing that he exceeds the minimum ownership and use thresholds. Due to the total capital gains being under $250,000, Jamie can exclude the entire amount from federal capital gains taxes.
Strategy #2: Step-up in Basis
According to the IRS, if you’ve inherited a property then later decide to sell it, the capital gains taxes you owe are calculated based on the property’s fair market value at the time of the decedent’s death instead of its original purchase price. This principle is called a step-up in basis or stepped-up basis and allows you to reduce the amount of capital gains taxes you owe by a significant degree.
Example: Maria inherited a house from her great-grandmother, Lucia, in Flint, MI, which she sold after using it as her primary residence for three years. The home price at the time of purchase was $15,000. At the time of Lucia’s death, its fair market value (FMV) was $350,000, and Maria sold it for $362,000.
Normally, Maria would owe long-term capital gains taxes on $347,000. However, because she inherited the home, the property’s basis was stepped up to $350,000. Consequently, Maria is considered to have realized a capital gain of $12,000: the difference between the FMV at the time of Lucia’s death and the final sale price.
How to Report Your Property Sale for Taxes in Michigan
Reporting your property sale for taxes in Michigan involves filing the necessary forms with both the federal and state tax authorities.
IRS Forms
To report the sale of your home on your federal tax returns, you must submit two forms: IRS Schedule D (Form 1040) and IRS Form 8949.
Form 8949 requires you to report whether your gains are long-term or short-term. Short-term gains must be listed under Part I, whereas long-term gains must be listed in Part II. If you can exclude the gains you’ve realized with a specific property, enter the letter code “H” in column (f) on the line corresponding to that property, then write the corresponding adjustment amount in parentheses and as a negative in column (g).
After completing Form 8949, enter the corresponding information regarding short-term and long-term gains in IRS Schedule D (Form 1040). Part I lets you enter short-term gains, whereas Part II is for long-term gains.
Michigan Department of Treasury Tax Forms
Michigan residents must report their capital gains from property sales on their state income tax returns. To report your capital gains, you must complete the following steps:
- Michigan Form MI-8949 Sales and Other Dispositions of Capital Assets: Complete the entire form to report all capital gains and losses.
- Submit your Form MI-8949 alongside a completed Michigan Form MI-1041 Fiduciary Income Tax Return.
FAQs
Here are the answers to some common questions about capital gains taxes in Michigan when selling a residence.
You can defer the capital gains tax payments by reinvesting in a similar property under a qualifying Section 1031 like-kind exchange. Once you sell that property, you must pay the cumulative capital gains taxes.
Land is a capital asset like real estate. If you sell the land and make a profit, this is considered a capital gain, and you must pay the taxes on it.
No, this exclusion ended in 1997 and was replaced with a policy that impacts all homeowners.
Both federal and state taxes apply to capital gains. At the federal level, it will be a lower rate than personal income. In Michigan, capital gains are taxed as income.
You do not pay capital gains taxes as part of the closing costs. The capital gains tax will be included in your tax returns, not the sale of the house.
No, capital gains taxes are not deductible. However, you may be able to use capital losses to offset capital gains and reduce your tax liability.
Yes, you will pay capital taxes on the sale of a second home if you make a profit because the tax exclusion for primary residences does not apply. The tax rate may vary depending on your income and whether you held the property for over a year.
No. If you lost money on a home investment, you have realized a capital loss, meaning you will not pay capital gains taxes on the sale of a home. However, you must still report the capital loss on your Michigan tax returns.
You must have used the property as a primary residence for at least two of the last five years. The years do not have to be consecutive.
Michigan has no legislation allowing senior citizens to avoid paying capital gains taxes.
