Selling rental property doesn’t always mean handing over a large chunk to the IRS or the state of Michigan. If you’re looking for ways to sell rental property without paying taxes in Michigan, some strategies can work in your favor. You need to understand how capital gains are taxed, how to defer taxes legally, and how the right planning can preserve more of your equity.
Some owners qualify for deferral under the 1031 exchange rules. Others plan by converting rental property to a primary home or using losses to offset gains. The key to avoiding or reducing your taxes when selling your rental property in Michigan is knowing which tax deferral strategies for real estate apply to your situation and documenting each step carefully.
Below, we provide tips for how to sell rental property without paying taxes in Michigan.
Capital Gains On Rental Property
Capital gains tax applies when the sale price of your rental property exceeds your adjusted basis. The adjusted basis includes your original purchase price, plus improvements, minus any depreciation claimed while the property was in service.
If you’ve held the property for longer than a year, any gain is considered a long-term capital gain. The federal government taxes these at 0%, 15%, or 20%, depending on your income. In Michigan, there is no special capital gains tax rate. The state taxes all income at a flat rate, currently 4.25%.
Understanding how the gain is calculated gives you the foundation for applying strategies that defer or eliminate the tax.
What Triggers A Tax Bill In Michigan?
The moment you sell a rental property, you may owe capital gains tax if the sale price exceeds your adjusted basis. You also may face a depreciation recapture, which is taxed at a flat federal rate of 25%.
In Michigan, capital gains are treated as regular income. If you’re in a higher income bracket, the combination of state and federal taxes can take a noticeable bite out of your profit. Selling without planning can create a tax bill you didn’t expect.
Timing, the property’s use, and your tax records all influence what you owe. Knowing how each factor affects your gain helps shape your strategy.
1031 Exchange: The Most Common Deferral Tool
A 1031 exchange allows you to sell your rental house and defer capital gains tax by reinvesting the proceeds into another like-kind property. You must follow strict IRS rules.
The replacement property must be similar, used for business or investment, and identified within 45 days of the sale. The purchase must close within 180 days. A qualified intermediary must handle the transaction. The funds cannot go directly to you.
If you sell a Michigan rental for $300,000 and reinvest all proceeds into another rental, you defer taxes on the entire gain. Your basis rolls into the new property, which means taxes are deferred, not forgiven. When you sell the replacement, the tax bill returns unless you do another exchange.
A 1031 exchange works best if you plan to stay in real estate or want to trade up to a higher-performing property.
Converting Rental Property To A Primary Residence
Turning your rental into your home before selling could reduce or eliminate taxes under the Section 121 exclusion. To qualify, you must live in the home for at least two out of the five years before the sale.
The exclusion allows single filers to exclude up to $250,000 of gain, and married couples up to $500,000. If you used the property as a rental during the five-year window, you may only qualify for a partial exclusion.
If you lived in the property for two years and rented it for three, you may still get a break on some of the gain. However, depreciation recapture still applies, and the IRS will tax that portion. It’s especially useful for landlords who want to exit real estate and move into the property during retirement or while transitioning housing.
Offset Gains With Capital Losses
When learning how to sell rental property without paying taxes, you can reduce or eliminate capital gains by using losses from other investments. The IRS allows you to offset capital gains dollar for dollar with capital losses.
If you made $50,000 in gains from selling a rental property but lost $30,000 on stocks, you only owe taxes on $20,000 of net gain. If your losses exceed your gains, you can deduct up to $3,000 per year against ordinary income and carry forward the rest.
Michigan honors federal treatment of capital gains and losses, so this strategy applies at both levels. Keep records of past investment losses and consult a tax professional if you’re unsure how to apply them.
Installment Sale Strategy
An installment sale allows you to spread out the gain over several years, reducing your annual tax burden. Instead of receiving the full price up front, you finance the buyer over time.
Each payment you receive includes principal, interest, and a portion of the capital gain. You only pay tax on the gain received each year, which can help you stay in a lower tax bracket.
If your sold rental property has a large gain and you want to avoid pushing into a higher tax tier, an installment sale may help. Just remember that interest income is taxable separately, and there’s always a risk the buyer may default.
Installment sales work well when selling to a tenant, family member, or trusted buyer who agrees to structured terms.
Rollover Into An Opportunity Zone Fund
Another way to defer sold rental property taxes is by reinvesting your gains into a qualified Opportunity Zone Fund. The federal government created these funds to encourage investment in designated low-income areas.
To qualify, you must reinvest within 180 days of the sale. Gains rolled into the fund are deferred until the earlier of the fund sale or December 31, 2026. If you hold the fund for at least 10 years, any appreciation earned within the fund is excluded from capital gains tax.
Several designated Opportunity Zones exist across Michigan, including parts of Detroit, Flint, and Benton Harbor. Investing in those areas may qualify you for the tax benefits, but you must vet the fund and understand the rules before committing.
Gift Or Inheritance Strategies
You can avoid capital gains tax entirely by gifting property, but it shifts the burden to the recipient. When you give a rental property to a child or relative, they receive your cost basis. When they sell, they owe taxes based on that basis.
If someone inherits the property, the basis resets to fair market value at the time of death. This eliminates all previous gains, including depreciation recapture. It’s one of the most effective ways to wipe out a tax bill.
For Michigan landlords with large portfolios, using gifting or inheritance as part of an estate plan may help preserve wealth and reduce tax liability across generations.
Deductions And Expenses That Reduce Your Gain
Even if you can’t avoid the tax entirely, reducing your gain with allowable deductions helps. You can subtract many of the expenses related to selling your rental property.
Allowable deductions include agent commissions, staging costs, legal fees, title charges, escrow fees, transfer taxes, and any required inspections. You can also increase your basis by adding the cost of capital improvements such as roofs, HVAC systems, or kitchen remodels.
Accurate records of depreciation, improvements, and closing costs matter. Without documentation, you may lose legitimate deductions that could reduce or eliminate your taxable gain.
Selling without a clear picture of those allowable expenses when selling rental property can cost you thousands in avoidable taxes. Always track everything from the beginning of ownership through the sale.
If you’re planning to sell your rental property fast in Michigan, reviewing all available strategies and deductions before listing can help you keep more of your equity where it belongs.
Get A Cash Offer On Your Rental Property From Ryan Buys Houses
Skip the waiting, fees, and repairs on your sold rental property. Ryan Buys Houses makes it easy to sell rental property fast in Michigan. Get a fair, no-obligation cash offer and close on your timeline. Whether your tenants just moved out or the property needs work, we’re ready to buy. Reach out today and see how simple the selling process can be.
