Selling a rental property in Michigan requires more than a signed purchase agreement. If you’ve sold rental property before or plan to soon, it helps to understand how allowable expenses when selling rental property affect your tax bill. Many property owners leave money on the table by overlooking deductible costs tied to the sale.
Expenses tied to marketing, agent commissions, legal work, or state-required fees may reduce taxable gain. Others, like capital improvements, increase your basis. If you’re trying to sell your rental property fast in Michigan, keeping accurate records and knowing which costs qualify can make a difference when it’s time to report income from the sale.
Why Tracking Expenses Matters
Selling a rental triggers a capital gain or loss calculation. The IRS and the state of Michigan both want to know what you made and they base that on the sales price minus your adjusted basis.
Your basis includes your original purchase price plus improvements minus depreciation; but it also includes many of the direct costs tied to the sale. Tracking every legitimate cost lets you reduce your reportable gain, which may reduce your tax bill.
Capital Improvements Vs. Repairs
Not all property-related expenses are treated the same. The IRS draws a line between repairs and capital improvements. Understanding the difference can help you calculate your adjusted basis correctly.
Capital Improvements are upgrades that add value or extend the life of the property. Examples include a new roof, HVAC installation, full kitchen remodel, or a room addition. You can add the cost of these improvements to your basis, which helps reduce your gain when you sell.
Property Repairs are considered ordinary maintenance and don’t qualify as part of your selling expenses. Fixing a leaking pipe, repainting walls, or patching drywall are not added to your basis. If they were made while the property was still in service as a rental, you may have already deducted them as part of your annual operating costs. So, including them again could result in double-dipping, which is not allowed.
Allowable Selling Expenses
You’re allowed to subtract certain selling expenses from your sales proceeds. These must be directly related to the sale and must be necessary to complete the transaction. These are not added to your basis, but rather reduce the amount you report as sales proceeds.
Commonly Allowed Selling Expenses
- Real estate agent commissions. These are among the largest selling expenses and are fully deductible against your proceeds.
- Title and escrow fees. Charges paid to title companies and escrow agents during closing fall into this category.
- Advertising or listing costs. If you paid out of pocket to list your property on real estate sites or paid for online ads, you can deduct those costs.
- Legal or document preparation fees. Anything paid to attorneys, title companies, or notaries to draft or process legal paperwork counts here.
- Transfer taxes and recording fees. In Michigan, sellers often cover state and local transfer taxes. These fees are deductible as part of the transaction.
- Home inspection or appraisal fees. If you paid for a pre-inspection or appraisal to help market or price your property, you could write off those amounts as part of the sale.
Michigan-Specific Considerations
Home sellers in Michigan typically pay the state transfer tax and sometimes the county tax as well. The state transfer tax rate is $3.75 per $500 of value, and some counties add $0.55 per $500. If you paid those charges at closing, you could deduct them from your proceeds as a direct selling expense.
In some Michigan counties, sellers may also face fees related to well or septic inspections, especially in rural areas. If those inspections were required to close the sale, they qualify as allowable expenses. Keep the receipts.
Pre-Sale Preparation Costs
Expenses you incur to prepare the rental for sale may also qualify, depending on their nature and timing. If the goal of the expense is to attract buyers or improve sale value, you can treat it as part of your selling cost.
- Cleaning and staging. Paying a service to deep clean or stage the property for showings can be deductible if clearly tied to the sale.
- Landscaping or curb appeal updates. If you planted flowers, trimmed trees, or refreshed mulch to help the property sell, the cost may count.
- Professional photography. High-quality photos help listings stand out. If you paid a photographer to shoot your listing, that expense qualifies.
- Temporary property management. If you hired a local manager to oversee the property while it was on the market, those costs can be tied to the sale.
- The key with pre-sale costs is documentation. Keep invoices, emails, and contracts to prove the purpose was tied to selling, not renting.
Depreciation Recapture And Adjusted Basis
If you’ve owned your Michigan rental for a few years, you likely claimed depreciation on your tax returns. That depreciation reduces your adjusted basis, which increases your taxable gain when you sell.
Say you bought the rental for $150,000 and made $20,000 in capital improvements. That brings your basis to $170,000. But if you claimed $30,000 in depreciation over the years, your adjusted basis is now $140,000.
When you sell your rental property, you subtract the adjusted basis from the net sales price (after deducting selling expenses). The IRS requires you to recapture the depreciation, which means you pay tax on the $30,000 at a higher rate, usually 25%.
Because depreciation affects your gain calculation, it’s important to keep detailed records of both improvements and prior depreciation. If you don’t, you risk overpaying.
Tax Filing Tips For Michigan Landlords
When you sell, you’ll need to report the transaction using IRS Form 4797 or Schedule D, depending on whether the rental was used for business. Most rental owners use Form 4797. You’ll report your adjusted basis, depreciation, and sale proceeds.
In Michigan, you also need to report the sale on your state income tax return. The gain from selling a rental property is treated as income, and Michigan does not have a separate tax rate for capital gains on rental property. Your federal and state filings must align.
If you used an accountant during ownership, they should have depreciation schedules and cost basis worksheets. If not, gather your HUD-1 or closing disclosure from when you bought and your records of capital improvements.
You may also include a copy of your closing statement from the sale, which breaks out each line-item cost. That document can support your deduction claims if ever audited.
Rental Sale Expenses You Cannot Deduct
Some expenses may feel related but don’t qualify for any deduction or offset. Knowing what not to include can keep your filing accurate.
- Mortgage payoff. You must pay off your mortgage, but it’s not a deductible expense. The loan was already offset through your prior interest deductions.
- Personal labor. If you did the work yourself to prep the property—cleaning, painting, or repairs—you can’t assign a value and deduct it.
- Loan interest after the rental left service. If you kept the property vacant for several months and the loan accrued interest, only interest during active rental service qualifies.
- Personal travel or meals. Even if you travel to check on the property or meet with your agent, personal costs usually don’t qualify as selling expenses.
Knowing where the IRS draws the line helps you avoid mistakes that could trigger an audit or delay your refund.
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