Michigan capital gains tax on real estate is simple to calculate: the state has no separate capital gains rate, so your gain, including depreciation recapture, is taxed at the flat 4.25% individual rate for 2026, and 24 cities (Detroit, Grand Rapids and Lansing among them) can add their own income tax. A properly structured 1031 exchange in Michigan defers that state tax along with the federal tax, but it does nothing about the seller-paid real estate transfer tax or the property tax reset when your replacement property changes hands.
Reviewed by Jon Hilley, CEO & Founder of 1031 Specialists. Last reviewed September 29, 2026.
| State tax on real estate gains | Flat 4.25% for tax year 2026 (confirmed by Michigan Treasury) |
|---|---|
| Long-term capital gains treatment | Taxed as ordinary income; no exclusion or lower rate for long-term gains |
| Nonresident withholding at closing | None for individual sellers; nonresidents report Michigan-source gain on their Michigan return |
| Withholding form | None required at closing |
| Transfer or conveyance tax (a 1031 does not defer it) | State $3.75 per $500 (0.75%) plus county $0.55 per $500 (0.11%), paid by the seller |
| Clawback on out-of-state replacement property | No |
| Conforms to Section 1031 | Yes, Michigan starts from federal adjusted gross income |
| Local income tax | 24 cities; Detroit is 2.4% for residents and 1.2% for nonresidents |
| Property tax note | Taxable value uncaps the year after a transfer of ownership |
Table of contents
- How much is capital gains tax on real estate in Michigan?
- Michigan tax on a $300,000 gain: worked example
- Michigan nonresident withholding: none at closing
- Michigan real estate transfer tax: what a 1031 does not defer
- Property tax uncapping on your replacement property
- Michigan conformity and clawback rules
- Moving into or out of Michigan
- Where 1031 exchanges happen in Michigan
- Federal 1031 rules in brief
- Common Michigan 1031 exchange mistakes
- Start your Michigan 1031 exchange
- Frequently asked questions
- Sources
How much is capital gains tax on real estate in Michigan?
Michigan taxes individuals at one flat rate. Treasury confirmed on April 15, 2026 that the rate for the 2026 tax year stays at 4.25%, because general fund revenue growth did not trigger the statutory rate cut. There are no brackets and no special treatment for long-term gains, so a gain you held for ten years is taxed the same as wages.
Because Michigan starts from federal adjusted gross income, the whole federal gain flows through: the long-term capital gain, the unrecaptured §1250 portion that the IRS taxes at up to 25%, and any §1245 recapture on personal property or cost-segregated components. All of it lands at 4.25%. You can model the federal recapture piece with our depreciation recapture calculator.
City income tax is the part sellers forget. Detroit, Grand Rapids, Lansing, Flint, Pontiac, Saginaw and 18 other cities levy an income tax. Detroit charges 2.4% to residents and 1.2% to nonresidents. City rates elsewhere are lower, and whether a particular gain is taxable depends on your residence and where the property sits, so check the ordinance of the city involved. A 1031 defers city income tax on the gain too, since the city tax follows the same recognized gain.
Michigan tax on a $300,000 gain: worked example
Assumptions: a $300,000 long-term gain on an investment property, $100,000 of it unrecaptured §1250 depreciation, a married couple filing jointly already in the top federal bracket, living outside a city with an income tax.
| Line | Math | Tax |
|---|---|---|
| Federal unrecaptured §1250 gain | 25% × $100,000 | $25,000 |
| Federal long-term capital gain | 20% × $200,000 | $40,000 |
| Net investment income tax | 3.8% × $300,000 | $11,400 |
| Federal subtotal | $76,400 | |
| Michigan income tax | 4.25% × $300,000 | $12,750 |
| Total deferred by a full 1031 | $89,150 |
A full exchange keeps $89,150 working in your next property. If you live in Detroit, add about $7,200 of city tax (2.4% × $300,000) for a total near $96,350. Compare selling outright with exchanging in our capital gains vs. 1031 exchange comparison.
Michigan nonresident withholding: none at closing
Michigan does not require the buyer or title company to withhold state income tax when an individual nonresident sells Michigan real estate. That makes closings here cleaner than in neighbors that do, but the tax is still owed. Gain on Michigan real property is Michigan-source income, so a nonresident who sells without an exchange files a Michigan return and pays 4.25% on it, plus city nonresident tax if the property is in a taxing city such as Detroit.
Foreign sellers are a separate matter: federal FIRPTA withholding still applies unless you qualify for an exception. See our guide to foreigners selling US property and FIRPTA.
Michigan real estate transfer tax: what a 1031 does not defer
Michigan charges two transfer taxes on a deed, and state law places both on the seller:
- State real estate transfer tax: $3.75 per $500 of consideration, which is $7.50 per $1,000 or 0.75%.
- County real estate transfer tax: $0.55 per $500, or $1.10 per $1,000 (0.11%) in most counties.
On a $1,000,000 sale that is about $8,600, paid at closing from your proceeds. Because the transfer tax is a closing cost of the relinquished sale, not an income tax, a 1031 exchange does not defer it. Paying it from exchange funds is normal and treated as a selling expense, but budget for it: it reduces the net equity you must reinvest to hit your target.
Property tax uncapping on your replacement property
This is the Michigan fact that most changes the math on a replacement purchase. Under Proposal A, a property's taxable value can rise each year by no more than 5% or inflation, whichever is less, while ownership stays the same. A transfer of ownership causes the taxable value to uncap in the calendar year following the transfer and reset to the state equalized value, which is half of market value.
For an investor buying a long-held apartment building or retail center, the seller's tax bill can understate yours by a wide margin. Underwrite the replacement property at the post-uncapping taxable value times the local millage, not the figure on the listing. The same reset does not help your relinquished property; it simply becomes the buyer's issue.
Michigan conformity and clawback rules
Michigan conforms to Section 1031 by starting with federal adjusted gross income, so gain deferred federally is deferred in Michigan. There is no clawback: if a Michigan resident exchanges into a property in Florida or Texas, Michigan does not track the deferred gain or require an annual filing after you move. If you later sell the replacement property while a Michigan resident, Michigan taxes the full deferred gain then.
Partial exchanges work the same way at the state level. Cash you keep or debt you do not replace is boot, taxable federally and at 4.25% in Michigan.
Moving into or out of Michigan
Michigan follows the usual residence rules. A resident is taxed on all income wherever the property is; a nonresident is taxed only on Michigan-source income, which includes gain on Michigan real estate. Because there is no clawback, a Michigan investor who exchanges into property in a no-income-tax state and then moves there can later sell with no Michigan tax on the deferred gain. Snowbird investors commonly exchange into Florida or Arizona.
The reverse also matters. If you move to Michigan holding a replacement property from a clawback state such as California or Oregon, that state may still claim the gain it deferred. Investors near the Toledo, South Bend and Chicago markets often exchange across the line into Ohio or Indiana; the Michigan rules above still apply to the Michigan side.
Where 1031 exchanges happen in Michigan
Metro Detroit, including Oakland, Macomb and Wayne counties, drives the most exchange volume, with industrial and flex space tied to the auto supply chain, suburban multifamily and single-tenant retail. Grand Rapids and the surrounding Kent and Ottawa County suburbs offer manufacturing, medical office and newer multifamily. Ann Arbor adds student and research-driven housing, Lansing and East Lansing mix government and university demand, and Traverse City and the northern lakeshore see short-term rental and second-home exchanges, which need care because vacation property must be held for investment to qualify. Check the city income tax and post-sale taxable value in each market before you commit.
Federal 1031 rules in brief
Identify replacement property in writing within 45 days of your sale and close within 180 days (or by your return due date with extensions, if earlier). A qualified intermediary must hold the proceeds from closing to closing. To defer all of the tax, buy replacement property of equal or greater value and replace the debt you pay off, with new debt or added cash. Our 1031 exchange guides cover the details, the 45-day identification validator checks your list, and the boot calculator shows what a partial exchange costs.
Common Michigan 1031 exchange mistakes
- Underwriting at the seller's taxable value. Proposal A uncapping means your property tax bill resets the year after you buy.
- Forgetting city income tax. Detroit residents pay 2.4% on top of the state 4.25%, and nonresidents owe 1.2% on Detroit property gain. Leave that out and a cash-out looks cheaper than it is.
- Treating the transfer tax as deferred. The 0.86% combined state and county tax is due at closing either way; reduce your reinvestment math accordingly.
- Converting an up-north cabin without a rental history. A lake house used mostly by the family is not investment property; see does my property qualify.
- Missing the Property Transfer Affidavit on the replacement. Michigan requires a buyer to file one with the local assessor after a transfer, and late filing brings penalties.
Start your Michigan 1031 exchange
Open your exchange before the relinquished property closes so the title company wires proceeds straight to us. Start your exchange online, book an intro call, or call (631) 438-1031. We will review the timeline, the transfer tax on your sale and the replacement properties you have in mind.
Frequently asked questions
How much is capital gains tax on real estate in Michigan?
Michigan taxes real estate gains as ordinary income at a flat 4.25% for 2026, with no lower rate for long-term gains. Residents of Detroit and 23 other cities can owe city income tax as well. Federal capital gains tax, recapture and the 3.8% net investment income tax apply on top.
How can I avoid capital gains tax on real estate in Michigan?
For investment property, a 1031 exchange defers both the Michigan 4.25% tax and the federal tax as long as you reinvest all proceeds in like-kind property through a qualified intermediary within the 45 and 180-day deadlines. Holding until death gives heirs a stepped-up basis. A primary residence may qualify for the federal home sale exclusion, which Michigan follows.
Does Michigan withhold tax when a nonresident sells property?
No. Michigan has no withholding requirement at closing for individual nonresident sellers. The gain is still Michigan-source income, so a nonresident who does not exchange must file a Michigan return and pay the tax.
Who pays the Michigan real estate transfer tax, and does a 1031 defer it?
The seller pays both the state tax of $3.75 per $500 and the county tax of $0.55 per $500 in most counties, together about 0.86% of the price. A 1031 exchange does not defer transfer tax because it is not an income tax.
Will my replacement property taxes go up in Michigan?
Usually. Under Proposal A the taxable value uncaps the year after a transfer of ownership and resets to the state equalized value, so the prior owner’s capped bill is not a reliable guide.
Does Michigan tax my deferred gain if I exchange into another state?
No. Michigan has no clawback rule, so if you exchange into property in another state and later sell it as a nonresident, Michigan does not tax the gain deferred from the Michigan sale.
Sources
- Michigan Treasury: 2026 individual income tax rate
- Michigan Treasury: transfer of ownership and uncapping
- Michigan Treasury: cities that impose an income tax
- City of Detroit: income tax information
- Newaygo County Register of Deeds: Michigan real estate transfer tax
Related: Ohio, Indiana, Wisconsin, Illinois and all 50 states.
This page is general information for investors, not tax or legal advice. Rates and local rules change, so confirm your numbers with a Michigan CPA or attorney before you sell.
