Selling investment property in Michigan can trigger several types of taxes — and understanding them beforehand prevents surprises. Whether you own a single-family rental, duplex, multifamily, or vacation rental, knowing how capital gains work can help you plan smarter.

What Are Capital Gains?

Capital gains are the profits you earn when you sell a property for more than you paid for it.
Formula:
Sale Price – Purchase Price – Selling Expenses – Improvements = Capital Gain

Michigan investors typically pay:
• Federal capital gains tax
• Depreciation recapture tax
• Michigan state income tax

Short-Term vs Long-Term Capital Gains

Short-term gains (held under 1 year):
Taxed as ordinary income.

Long-term gains (held over 1 year):
Taxed at 0%, 15%, or 20% depending on your income level.

Most Michigan investors hold long-term to avoid the higher short-term tax bracket.

Depreciation Recapture

If you depreciated the property (as required), the IRS taxes the depreciation you claimed when you sell.

Rate: up to 25%
This surprises many investors because depreciation reduces taxes annually but increases taxes when selling.

Michigan State Taxes

Michigan has a flat income tax rate that applies to your capital gains as well. Expect around 4% on gain amounts.

Using a 1031 Exchange in Michigan

A 1031 exchange allows you to defer capital gains taxes by reinvesting the profit into another investment property.

Rules include:
• Identify a new property within 45 days
• Close within 180 days
• Use a qualified intermediary
• Replace equal or greater value and debt

Michigan investors frequently use 1031 exchanges to grow portfolios without tax drag.

Primary Residence Exemption vs Rental Property

If the home was once your primary residence for 2 of the last 5 years, you may qualify for up to $250,000 (single) or $500,000 (married) in tax-free gain.
This exemption does NOT apply to pure rental/investment property.