This article is general information and not tax advice. Consult a CPA or tax attorney before making decisions.
TL;DR
When you sell your primary residence in Michigan, the IRS lets you exclude up to $250,000 ($500,000 for married filing jointly) of capital gain from federal tax — as long as you’ve owned AND lived in the home as your primary residence for at least 2 of the last 5 years. Gains ABOVE the exclusion are taxed at 0%, 15%, or 20% (federal long-term capital gains rates) plus 4.25% Michigan state tax. Most Downriver Michigan sellers owe nothing in capital gains. Here’s how it works.
The Section 121 Exclusion
Section 121 of the IRS code lets primary-residence sellers exclude up to:
- $250,000 of capital gain if single
- $500,000 of capital gain if married filing jointly
To qualify, you must have:
- Owned the home for at least 2 of the last 5 years, AND
- Used it as your primary residence for at least 2 of the last 5 years
You can use this exclusion once every 2 years.
How to Calculate Capital Gain
Capital gain = Sale price (minus selling costs) – Adjusted cost basis
Adjusted cost basis = Original purchase price + Major improvements (kitchen remodel, addition, new roof) – Depreciation if any portion was rented.
Example:
- Bought home in 2015 for $135,000
- $22,000 in kitchen remodel + $9,000 new roof = $31,000 capital improvements
- Adjusted basis: $166,000
- Sold in 2026 for $295,000 with $18,000 closing costs/commission
- Net sale price: $277,000
- Capital gain: $277,000 – $166,000 = $111,000
If you’re married filing jointly, you owe $0 in federal capital gains tax (well under $500K exclusion).
What Counts as “Capital Improvements”?
Improvements that add value, prolong the home’s life, or adapt it to new uses INCREASE your basis. Repairs do not.
Yes (improvements): Kitchen remodel, bathroom remodel, addition, new roof, new windows, new HVAC, new flooring, finished basement, pool/deck addition.
No (repairs, not improvements): Painting, fixing leaks, replacing broken fixtures, regular maintenance.
Keep receipts. The IRS allows you to count improvements for any year you owned the home.
Partial Exclusion (If You Don’t Meet the 2-Year Rule)
You may still qualify for a partial exclusion if you sell early due to:
- Job relocation (new job at least 50 miles further away)
- Health reasons
- Unforeseen circumstances (divorce, death of spouse, multiple births, employment loss)
State Tax
Michigan taxes capital gains as ordinary income at the flat 4.25% rate. The federal Section 121 exclusion is NOT recognized at the federal level alone — but Michigan generally follows federal AGI calculation, so excluded federal gain is also excluded at the state level.
Frequently Asked Questions
Do I have to pay capital gains tax when I sell my house in Michigan?
Most Michigan home sellers pay $0 in capital gains tax because they qualify for the IRS Section 121 exclusion ($250K single, $500K married). You qualify if you owned and lived in the home as a primary residence for at least 2 of the last 5 years.
What is the capital gains exclusion for selling a primary residence?
$250,000 of gain excluded if single filer, $500,000 if married filing jointly. Exclusion can be used once every 2 years.
How is capital gain on a home calculated?
Sale price minus selling costs minus adjusted cost basis (purchase price plus capital improvements). Repairs do not count toward basis.
Do home improvements reduce capital gains tax?
Yes — capital improvements increase your cost basis, which reduces taxable gain. Keep receipts for kitchen remodels, additions, roofs, HVAC, windows, and major flooring projects.
What if I haven’t lived in the home for 2 of the last 5 years?
You may still qualify for a partial exclusion if you’re selling because of job relocation, health, or unforeseen circumstances like divorce or job loss.
Does Michigan have a state capital gains tax?
Michigan taxes capital gains as ordinary income at a flat 4.25%. Federal exclusions generally flow through to state taxable income.
Selling Soon?
We can model your likely net proceeds AND coordinate with a Downriver-area CPA for the tax side. Fill out our contact form or text 734-977-1405.
Chris Bujaki with The Saward Team, brokered by eXp Realty