Capital gains tax in Michigan (2026): selling a business, real estate or farm

Start with the city, not the state

The Michigan rate is easy: 4.25% for the 2026 tax year, flat, on federal adjusted gross income after Michigan adjustments (Michigan Treasury notice, April 2026). Treasury confirmed the rate stays at 4.25% because general fund revenue fell 1.56% while inflation rose 2.70%, so the statutory trigger that can cut the rate for a year did not fire for 2026.

What surprises sellers is the second layer. Michigan Treasury lists 24 cities that levy income-related taxes, including Detroit, Grand Rapids, Lansing, East Lansing, Flint, Saginaw, Pontiac, Port Huron, Jackson, Battle Creek and Muskegon. Detroit's 2026 rates are 2.4% for residents and 1.2% for nonresidents (Treasury Form 5123, 2026). For a Detroit resident, the $1.5 million gain in the example would carry about $36,000 of city tax on top of the state's $63,750, simple arithmetic at 2.4% (2026).

How Detroit and other cities reach a sale

City income taxes follow their own ordinances, but the Detroit returns show the pattern. A Detroit resident's return picks up capital gains generally. The Detroit nonresident return (Form 5119, 2025) has a separate line for gain or loss from the sale of tangible property located in the City of Detroit, so a suburban owner selling a Detroit building pays the 1.2% nonresident rate (2026) on that gain. The Detroit return also carries a line for capital gains attributable to periods before July 1, 1962, a reminder that city tax history is older than the state's.

If you own property in one taxing city and live in another, check both. The other 23 cities administer their own forms, so confirm the rate and the treatment of gains with the city's income tax office before you set a closing date.

No special rate means every piece of the deal costs the same

Because Michigan does not discount long-term gain, the state does not care whether a dollar is labeled goodwill, Section 1231 gain on land, unrecaptured Section 1250 gain or Section 1245 recapture. All of it is taxed at 4.25% for 2026. That changes the negotiation: the purchase price allocation still matters for the federal return, where recapture can hit 37% and long-term gain tops out at 20% above $613,700 of joint taxable income (Rev. Proc. 2025-32, 2026), but it is neutral for Michigan. For the federal layer in full, see how long-term capital gains are taxed.

The flip side is that Michigan follows federal netting through AGI, so a capital loss carryforward or a released passive loss reduces Michigan income too. A loss harvesting plan before closing helps both returns.

The transfer tax is the seller's cost in Michigan

Michigan puts the real estate transfer tax on the seller. Under MCL 207.523(2) the seller or grantor is liable, and the tax is due to the county treasurer within 15 days of delivering the deed. Two layers apply:

• State: $3.75 for each $500 of value, about 0.75% (MCL 207.525, in effect since 1995).
• County: 55 cents per $500 in counties under 2,000,000 people, and up to 75 cents in a county of 2,000,000 or more if the county board authorizes it (MCL 207.504).

Selling the LLC instead of the building does not always avoid it. MCL 207.523(1)(c) taxes a contract transferring a controlling interest in an entity when real property is 90% or more of the entity's fair market value. When a sale mixes real and personal property, the tax applies only to the real property if the values are stated separately on the instrument or an attached affidavit (MCL 207.525(2)), which is worth doing for a farm, a gas station or a restaurant with equipment.

Deferral paths that work in Michigan

Michigan starts from federal AGI, so federal deferral carries through. A 1031 exchange defers both the federal and the 4.25% Michigan tax (2026) on investment real estate, and a Section 453 installment sale reports gain to Michigan as payments arrive. With a flat rate, spreading a sale does not lower the Michigan rate the way it does in a graduated state; the benefit is federal bracket management and keeping each year's income below the net investment income tax and Medicare surcharge thresholds. For farms and closely held companies, the seller financing guide covers how to secure the note.

Residency and moving before a sale

Gain on Michigan real property is Michigan income no matter where the seller lives, and a Detroit property stays inside Detroit's nonresident tax. Gain on intangibles, such as shares of a corporation, is generally allocated to the seller's domicile. That makes a genuine move before selling stock in a Michigan company worth modeling, and almost pointless for a building. The residency change analysis explains what a move has to look like to hold up. For an owner who may hold instead, compare the sale with a step-up at death. Get the Big Sale Tax Analysis to compare every path with your city layer included.

Run your own numbers

Frequently asked questions