Michigan does not have a separate capital gains tax rate. When you sell a house at a profit, any taxable gain flows onto your federal return, and Michigan taxes it like ordinary income at the state’s flat 4.25% rate. Whether you owe anything at all usually comes down to one federal rule.
The exclusion that wipes out most home sale taxes
If the house was your primary residence for at least two of the last five years, the IRS Section 121 exclusion lets you exclude up to 250,000 dollars of gain, or 500,000 dollars for a married couple filing jointly. The statewide median sale price in our latest quarterly data was 260,500 dollars, so a typical Michigan homeowner who bought years ago and sells their primary residence owes nothing, federal or state.
When you do owe: rentals, flips, and second homes
- Investment and rental property gets no exclusion, and depreciation you claimed is recaptured at up to 25% federally
- Second homes and cottages get no exclusion either, so long held lake property can carry a real tax bill
- Houses owned less than a year are taxed at short term rates, which match your ordinary federal bracket
- Inherited houses are the exception in your favor: the stepped up basis usually erases the gain, as we cover in our Michigan inheritance tax guide
A worked example
Say you bought a Michigan rental for 120,000 dollars, put 30,000 dollars of improvements in, and sold for 260,500 dollars. Your basis is roughly 150,000 dollars, leaving about 110,000 dollars of gain before depreciation recapture. Federally that gain is taxed at 0%, 15%, or 20% depending on income, and Michigan adds its flat 4.25%, about 4,675 dollars to the state. Keeping receipts for every improvement is the cheapest tax strategy there is.
Timing the sale
Because the gain stacks on top of your other income, the year you sell matters. Some owners sell in a lower income year, some harvest losses elsewhere, and estates often sell quickly to use the stepped up basis. Current prices and inventory for nine Michigan metros are in our Michigan housing market data hub if you want to see what your market is doing. And when the plan is simply to sell without repairs or showings, we buy houses across Michigan for cash. This article is general information, not tax advice, so run your specific numbers with a CPA.