Does Michigan recognize 1031 exchanges?
Yes. A Michigan 1031 exchange is treated the same way it is federally, because Michigan taxable income starts from federal adjusted gross income under MCL 206.30, and gain deferred in a valid exchange never enters that figure. Michigan refers to the Internal Revenue Code in effect on January 1, 2025, or, at the taxpayer’s option, the code in effect for the tax year, under MCL 206.12(3).
At Michigan’s 4.25% rate for 2026, each $1 million of deferred gain holds back $42,500 of Michigan tax. The federal tax deferred on the same gain is several times larger, so the exchange decision is usually driven by the federal numbers.
Federal 1031 rules that apply in Michigan
Michigan adds no deadlines, so the federal ones control. You have 45 days from the sale to identify replacement property in writing and 180 days, or your return due date if that is sooner, to close on it. Both properties must be real property held for investment or for use in a business, and a qualified intermediary must hold the proceeds.
To defer all the gain, buy at or above the net sale price and reinvest all the net cash. Cash you keep, and old mortgage debt that isn’t replaced by new debt or added cash, is boot, taxed by the IRS and by Michigan at 4.25%. Our 1031 exchange rules guide covers identification and boot, and the complete 1031 exchange guide explains the process end to end.
Does Michigan have a 1031 clawback?
No. Michigan does not track deferred gain after you exchange a Michigan building for one in another state. The states with clawback or tracking rules are California, Massachusetts, Montana and Oregon. A Michigan owner who sells in Grand Rapids and buys in Arizona files nothing extra with Michigan in later years.
Michigan does keep its claim on gain while the property is here. Under MCL 206.112(1), capital gains from sales or exchanges of real property located in Michigan are allocable to Michigan, so a nonresident who receives boot from an exchange of Michigan property owes Michigan tax on it.
Michigan withholding and transfer taxes at closing
We found no Michigan rule requiring the title company to withhold income tax from a seller’s proceeds, with or without an exchange. Any Michigan tax on boot is paid with your return and estimated payments.
Transfer taxes are a different matter. Michigan’s state real estate transfer tax of $3.75 per $500 (MCL 207.525) and the county tax of $0.55 per $500 in counties under 2 million people (MCL 207.504) are charged on the deed, and an exchange doesn’t change that. On a $2,600,000 sale the two together come to $22,360. The seller is liable for the state tax under MCL 207.523, so budget it as a cash cost of the exchange, paid from proceeds before the intermediary receives the rest.
- Tell the title company and intermediary at the start that the sale is part of an exchange.
- Ask your intermediary and CPA how each closing cost paid from exchange funds, including transfer tax, will be treated.
- Keep cash for repairs or reserves out of the exchange only if you accept that it will be taxed as boot.
Does Michigan regulate qualified intermediaries?
No. Michigan is not one of the nine states with laws regulating exchange intermediaries, which are California, Colorado, Connecticut, Idaho, Maine, Nevada, Oregon, Virginia and Washington. No Michigan statute requires an intermediary to carry a bond, hold funds in a separate account or meet any licensing standard.
That leaves the protection to your exchange agreement and your own checks.
- Ask whether funds are held in a separate account for your exchange or pooled with other clients’ money.
- Require two signatures, or your written approval, for any withdrawal.
- Ask for proof of fidelity bond and errors and omissions coverage and the amounts.
- Ask how long the company has handled exchanges and who audits it.
- Make sure the intermediary was not your attorney, CPA, employee or broker in the past two years.
A Michigan replacement uncaps its taxable value
If your replacement property is in Michigan, plan on its property tax going up the year after you buy it. Under MCL 211.27a(3), a transfer of ownership uncaps taxable value, which for the following year becomes the property’s state equalized value, up to half of true cash value. The seller’s low capped bill doesn’t come with the building.
This affects which replacement you can afford. A building priced at a cap rate based on the seller’s taxes will produce less NOI for you once the bill resets. Underwrite the replacement with the uncapped tax, using the non-homestead millage for its exact city and school district from Treasury’s total rates report. After the reset, taxable value can rise by no more than 5% or inflation a year, whichever is less, until the next sale; the State Tax Commission set the 2026 limit at 2.7%. You also need to file the transfer notice with the local assessor within 45 days of buying.
Common 1031 exchange paths for Michigan owners
Most Michigan exchanges follow one of three paths.
Michigan to Michigan is common for owners consolidating smaller buildings into one larger property in the Grand Rapids, Lansing or Ann Arbor markets. There are no extra state income tax filings, but the replacement uncaps, so the property tax line rises in year two.
Michigan to out of state appeals to owners moving to Florida, Arizona or Tennessee, or chasing lower property taxes. Michigan adds no annual filing. Check the destination state’s rules on withholding and future sales.
Out of state into Michigan brings investors from higher-cost markets. A buyer coming from California or Oregon still owes that state’s tracking filings, and also faces Michigan uncapping on the building they buy.
Worked example: a Michigan exchange with some cash out
An owner sells a 32-unit building in Lansing for $2,600,000. Selling costs of $120,000, including the $22,360 of transfer tax, and an adjusted basis of $1,000,000 leave a gain of $1,480,000. The $1,100,000 mortgage is paid off, leaving $1,380,000 of net proceeds. The owner takes $100,000 in cash and the intermediary receives $1,280,000.
The owner buys a $2,900,000 building in Bay City with the $1,280,000 of exchange funds and a new $1,620,000 loan. New debt exceeds the old, so the only boot is the $100,000 of cash. That much gain is recognized and $1,380,000 is deferred. At 4.25%, the Michigan tax on the boot is $4,250 and the Michigan tax deferred is $58,650.
Then the property tax. Assuming the purchase price reflects true cash value, the Bay City building’s state equalized value is $1,450,000, and in the year after purchase its taxable value uncaps to that amount. At Bay City’s 2025 non-homestead total of 64.7281 mills, the tax is about $93,856 a year. The owner should have used that number, not the seller’s capped bill, when deciding what to pay.
| Item | Amount |
|---|---|
| Sale price | $2,600,000 |
| State and county transfer tax | $22,360 |
| Total gain | $1,480,000 |
| Cash boot taken | $100,000 |
| Gain deferred | $1,380,000 |
| Michigan tax on boot (4.25%) | $4,250 |
| Michigan tax deferred (4.25%) | $58,650 |
| Replacement property tax after uncapping | $93,856 a year |
Partial exchanges and mortgage boot
Michigan taxes boot the same way the IRS does, at its flat 4.25%. That makes the Michigan cost of a partial exchange easy to figure: each $100,000 of boot adds $4,250 of Michigan tax, plus the federal tax on the same amount.
Boot is not only cash. Suppose the Lansing owner in the example had bought a $2,250,000 building instead, using the same $1,280,000 of exchange funds and a $970,000 loan. The $1,100,000 mortgage paid off would be replaced by only $970,000 of new debt, so $130,000 is mortgage boot. Added to the $100,000 of cash, recognized gain rises to $230,000 and the Michigan tax on it to $9,775. Bringing $130,000 of outside cash to the purchase, or borrowing at least $1,100,000, would have kept the boot to the cash taken.
A smaller replacement also uncaps at a lower state equalized value, so the property tax on it is lower. Weigh that against the boot before you choose the cheaper building.
Timeline tips for a Michigan exchange
Line up candidates before you list. The 45 days start at closing and include weekends and holidays.
- Sign the exchange agreement and assign the purchase agreement before closing.
- Get the replacement’s SEV and its school district’s non-homestead millage before you make an offer.
- File the transfer notice for the replacement with the local assessor within 45 days of closing.
- If you sell late in the year, extend your return so the due date does not cut the 180 days short.
- Budget the transfer taxes on your sale as a cash cost from proceeds.
Selling a Michigan apartment building as part of an exchange
Skyline buys apartment buildings with five or more units in Michigan. We buy directly, close on your timeline, and can work inside 1031 deadlines. We work with your intermediary on the assignment and can set a closing date that gives you time to find the replacement before your 45 days start.
For the tax you would owe without an exchange, see Michigan capital gains tax on real estate, and for the uncapping rules in more detail, the property tax rate in Michigan. The 1031 exchange calculator runs the federal side for your own numbers.
Selling? Spread the tax with seller-carry terms
If a large tax bill is what is keeping you from selling, an installment sale may help. When you carry part of the price as a note, the gain is generally reported as you receive payments instead of all in the year of sale. Some parts of the gain, such as certain depreciation recapture, can still be due up front, so run the numbers with your CPA first.
Skyline Capital Investments buys apartment buildings with five or more units and can offer seller-carry terms, or a delayed closing that fits your 1031 timeline. Send the address and unit count and we typically respond within 48 hours. How seller financing works · How an installment sale is taxed · Seller financing calculator.
Get A Seller-Carry Offer
