Michigan Capital Gains Tax on Real Estate

By Skyline Capital Investments · Updated October 26, 2026 · 7 min read

Does Michigan have a capital gains tax?

Michigan capital gains tax on real estate is simply the state income tax on your gain, at one flat rate. The Michigan Department of Treasury confirmed in April 2026 that the rate for individuals and fiduciaries for the 2026 tax year is 4.25%, set by MCL 206.51.

Michigan starts from federal adjusted gross income under MCL 206.30 and has no general exclusion for capital gains. A building you held for 25 years is taxed at the same 4.25% as wages. The one narrow break is a deduction for interest, dividends and capital gains available only to seniors born before 1946, with base limits of $9,420 for a single return and $18,840 for a joint return that are indexed for inflation.

Why the 2026 rate stayed at 4.25%

Michigan’s rate can fall automatically in a year when general fund revenue grows faster than inflation. The test in MCL 206.51(1)(c) is run each year by the State Treasurer and the directors of the House and Senate Fiscal Agencies, using the state’s annual financial report.

For 2026 the trigger was not met. Using the state’s fiscal year 2025 financial report, Treasury found general fund revenue fell 1.56% while inflation rose 2.70%, so the formula produced no cut. If you are timing a sale across years, plan on 4.25% unless Treasury announces otherwise for a later year.

How Michigan and federal capital gains tax stack

You pay both, figured separately and added together. Federal long-term gain is taxed at 0%, 15% or 20% depending on where it lands on top of your other taxable income, and IRS Revenue Procedure 2025-32 sets the 2026 start of the 20% rate at $613,700 for a joint return and $545,500 for a single filer.

The share of the gain that equals depreciation you claimed is unrecaptured Section 1250 gain, taxed federally at up to 25%. The 3.8% net investment income tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income passes $250,000 on a joint return or $200,000 for a single filer.

Michigan’s flat rate makes the state side easy to estimate: take 4.25% of the total gain, including recapture. On a $1 million gain that is $42,500. Your Michigan tax is deductible on the federal return only as an itemized state and local tax deduction, which is capped, so on a sale this size most of it gives no federal benefit.

Michigan city income taxes

Twenty-four Michigan cities levy their own income tax, according to Treasury. Detroit’s is administered by the state. The others, which include Grand Rapids, Lansing, East Lansing, Flint, Saginaw, Pontiac, Jackson, Battle Creek, Muskegon and Port Huron, run their own.

Detroit’s rates, on Treasury’s 2025 city returns, are 2.4% for residents and 1.2% for nonresidents. Treasury’s Detroit instructions say residents report gains on all property, while nonresidents report gains from real or tangible property located in Detroit. So a $1 million gain would add about $24,000 of city tax for a Detroit resident, and about $12,000 for a nonresident selling a Detroit building.

If you live in one of the other cities, or own the building in one, ask your CPA whether the city taxes your gain and at what rate before you estimate your net proceeds. Each city sets its own rules and rates, so check with the city tax office for the year of your sale.

Selling Michigan property as a nonresident

A nonresident still owes Michigan tax on the gain from Michigan real estate. Under MCL 206.112(1), capital gains and losses from sales or exchanges of real property located in Michigan are allocable to Michigan, so an owner living in Florida or Ohio who sells a building in Kalamazoo files a Michigan return for the year of the sale and pays 4.25% on the gain.

Plan for the payment yourself. We did not find a Michigan requirement for the title company to hold back income tax from a seller’s proceeds, so the tax is due with your return and estimated payments rather than at the closing table. If the building is held in an LLC taxed as a partnership, the gain passes through to the members, and each nonresident member reports their share to Michigan.

Michigan transfer taxes at closing

Michigan charges two transfer taxes on a deed, and the seller is liable for the state tax under MCL 207.523. Unlike income tax, these are due at closing whether you have a gain or not.

• Counties with 2 million or more residents may charge up to $0.75 per $500 for the county tax.
• The state tax has exemptions, such as qualifying principal residence sales and some transfers between an entity and its owners. A sale of an apartment building to an unrelated buyer usually doesn’t fit any of them.

Depreciation recapture in Michigan

Michigan taxes depreciation recapture at the same 4.25% as the rest of the gain. There is no Michigan equivalent of the federal 25% rate on unrecaptured Section 1250 gain, so the mix of recapture and capital gain changes your federal bill but not your Michigan bill.

Because Michigan starts from federal adjusted gross income, the depreciation you took federally is generally the depreciation that counts for Michigan. Michigan refers to the Internal Revenue Code in effect on January 1, 2025, or, if you choose, the code in effect for the tax year, under MCL 206.12(3). There is one important exception. For tax years beginning after 2024, MCL 206.30(1)(ff) has Michigan figure income as if bonus depreciation under Section 168(k) and expensing under Section 179 still worked as they did on December 31, 2024, and as if the new Section 168(n) did not apply. If you claimed 100% federal bonus depreciation on property placed in service in 2025 or later, for example after a cost segregation study, your Michigan depreciation and basis can differ from federal, so ask your CPA how that affects your sale year.

Worked example: selling a $2M apartment building in Michigan

A married couple filing jointly sells an 18-unit building in Grand Rapids for $2,000,000 and pays $110,000 in selling costs, so the amount realized is $1,890,000. They paid $1,050,000 and have claimed $320,000 of depreciation, leaving an adjusted basis of $730,000 and a gain of $1,160,000: $320,000 of unrecaptured Section 1250 gain and $840,000 of long-term capital gain. They have $180,000 of other taxable income and a $900,000 mortgage.

Federal tax: the $320,000 of Section 1250 gain is figured here at the 25% maximum, $80,000. The $840,000 of capital gain stacks on $500,000 of income, so $113,700 is taxed at 15% ($17,055) and $726,300 at 20% ($145,260). Their MAGI rises to $1,340,000, so the 3.8% NIIT applies to $1,090,000, or $41,420. Federal total: $283,735.

Michigan tax: 4.25% of $1,160,000 is $49,300. Combined income tax is $333,035, about 29% of the gain. The deed also carries $17,200 of state and county transfer tax, already counted in the selling costs here. After paying off the loan, the couple nets $990,000 before income tax and about $656,965 after, before any Grand Rapids city income tax.

How a 1031 exchange changes the Michigan tax

A valid 1031 exchange defers the Michigan tax along with the federal tax, because deferred gain never enters federal adjusted gross income, which is where Michigan starts. In the example, a replacement worth at least $1,890,000, bought with all $990,000 of net cash, would defer the full $333,035.

Michigan does not follow your gain out of state. California, Massachusetts, Montana and Oregon have clawback or tracking rules, but a Michigan owner who exchanges into Arizona or Tennessee has no Michigan form to file each year. The transfer taxes on the deed are still due, since an exchange does not change the sale. Our page on the 1031 exchange in Michigan covers the state side, including what buying a Michigan replacement does to your property tax.

Cash you keep is boot and is taxed by both governments. The 1031 exchange calculator and the capital gains tax calculator run the federal numbers for your own sale.

Ways Michigan sellers lower or defer the tax

With one flat rate, Michigan gives sellers no bracket to manage, so the main tools work on the size and timing of the gain rather than the rate.

• A 1031 exchange, which defers the 4.25% Michigan tax along with the federal tax and has no Michigan follow-up filing if you buy out of state.
• An installment sale, which spreads the gain over the years you collect principal. Michigan’s rate is the same each year, so the benefit is mostly federal, where spreading the gain can keep more of it in the 15% bracket.
• Holding the building so heirs receive a stepped-up basis, which removes the built-in gain for both federal and Michigan purposes.
• Records of every capital improvement, roof, boiler and unit renovation, since each dollar added to basis cuts the gain taxed at 4.25% plus the federal rate.
• Checking city income tax rules before you choose where to live in the year of a sale, if a move is already in your plans.

Selling a Michigan apartment building

Skyline buys apartment buildings with five or more units in Michigan, from Detroit and Grand Rapids to Lansing, Kalamazoo and Ann Arbor. We buy directly, close on your timeline, and can work inside 1031 deadlines. If you are exchanging, we can set a closing date that gives you time to line up the replacement, and we work with your intermediary on the assignment.

For the annual cost a buyer will model, including the uncapping of taxable value after a sale, see our page on the property tax rate in Michigan. For notice, deposit and eviction rules, see Michigan landlord-tenant law for apartment owners.