The short answer
Selling Michigan investment property through a 1031 exchange defers Michigan's flat 4.25% income tax along with the federal tax, because Michigan's taxable income is built on federal adjusted gross income and the deferred gain never enters it. Nothing is withheld at a Michigan closing, and the state does not pursue deferred gain once it moves out of Michigan. The Michigan-specific costs sit elsewhere: the seller pays $8.60 per $1,000 in state and county transfer tax, and the buyer inherits an uncapped taxable value the year after the deed, which shapes what Michigan buyers will offer.
Michigan at a glance
| State tax on real estate gain | Flat 4.25% for tax year 2026; capital gain is taxed like any other income |
|---|---|
| 2026 rate determination | Treasury confirmed 4.25% on April 15, 2026; general fund fell 1.56%, inflation 2.70% |
| Closing withholding | None; a nonresident reports the gain on a Michigan return |
| Claw-back on out-of-state replacement | None |
| Transfer tax | State $3.75 + county $0.55 per $500 ($8.60 per $1,000); seller liable, MCL 207.523 |
| Taxable value uncapping | Year after a transfer, taxable value resets to SEV (MCL 211.27a(3)) |
| Property Transfer Affidavit | Form 2766 (L-4260) due to the assessor within 45 days; $20/day up to $1,000 for commercial |
| Non-homestead school levy | Rental and commercial property pay up to 18 mills that a principal residence does not |
Michigan uncaps taxable value the year after your property changes hands
Under Proposal A, a Michigan parcel's taxable value can rise each year by no more than the lesser of 5% or inflation (MCL 211.27a(2)). When ownership transfers, subsection (3) resets taxable value for the following calendar year to the state equalized value, which is meant to be half of market value.
For a long-held rental that gap can be large. The seller does not pay the higher bill, but the buyer does, and Michigan buyers price the uncapped taxes into their offers. Sellers who understand the reset can explain it rather than lose the negotiation to it.
Uncapping also follows entity sales. Conveying more than 50% of the ownership of a corporation, partnership or LLC that holds the property is a transfer of ownership under MCL 211.27a(6)(h), so a sale of the LLC rather than the deed does not keep the cap.
Nothing on Form 2766's list of exemptions from uncapping covers a like-kind exchange. If you buy deeded Michigan replacement property, it uncaps for you exactly as it would for a cash buyer.
Form 2766 and the 45-day clock, with $20-a-day penalties on commercial deals
The buyer files the Property Transfer Affidavit, Treasury Form 2766 (also numbered L-4260), with the city or township assessor within 45 days of the transfer. It records the parties, date, consideration and parcel number, and it must be filed even when no deed is recorded, such as on a land contract.
Missing the deadline is expensive under MCL 211.27b. The assessor still uncaps, back taxes are levied with interest and penalty from the original due date, and a separate late fee runs at $5 per day up to $200 for most property and $20 per day up to $1,000 for commercial or industrial parcels, or a flat $20,000 if the price exceeded $100,000,000.
Sellers exchanging out of Michigan are usually on the other side of this form, but the same rule reaches any deeded Michigan replacement property you buy within the 180-day window.
A flat 4.25% on the gain for 2026, and why the 2023 dip did not last
Michigan taxes individuals at a single 4.25% rate, and because MCL 206.30 defines taxable income as federal adjusted gross income with state adjustments, capital gain from a Detroit duplex or a Grand Rapids strip center is taxed at that same 4.25%. There is no lower capital-gains rate and no exclusion for real estate.
The rate briefly fell to 4.05% for 2023 when a revenue trigger fired; the Court of Appeals held in 2024 that any such reduction is temporary, and the rate returned to 4.25%. On April 15, 2026 the Treasury confirmed 4.25% for tax year 2026 because general fund revenue for the fiscal year ended September 30, 2025 fell 1.56% while inflation ran 2.70%.
Gain deferred under Section 1031 is excluded from federal AGI, so it never reaches the Michigan return. That is the whole of Michigan's conformity: there is no separate election, form or add-back for the state.
Transfer tax of $8.60 per $1,000, and the seller is the one liable
Michigan's State Real Estate Transfer Tax is $3.75 for each $500 of value (MCL 207.525), and the county real estate transfer tax adds 55 cents per $500 in every county under 2,000,000 people (MCL 207.504). Together they come to $8.60 per $1,000 of the price.
MCL 207.523(2) makes the seller or grantor liable for the state tax. On a $1,500,000 sale the combined tax is $12,900, an exchange expense that the closing statement handled by the qualified intermediary should show.
The state tax also reaches the sale of a controlling interest in an entity whose real property is 90% or more of its assets, so an entity-level sale is not a way around it.
No withholding at closing, but Michigan cities with an income tax can reach nonresidents
Michigan has no rule requiring a buyer or closing agent to withhold state income tax from a nonresident seller's proceeds. A nonresident who sells Michigan real estate reports the gain on a Michigan nonresident return for the year of sale, and a completed exchange means there is no gain to report.
City income taxes are the wrinkle. Under the City Income Tax Act, MCL 141.613(c), a city that levies an income tax, Detroit among them, may tax a nonresident on capital gains from, and net rental profits of, real property located in the city. The federal deferral carries into the city return the same way it carries into the state return, but rental income from a city property is taxable there while you own it.
Non-homestead property pays up to 18 mills that a principal residence does not
School districts levy up to 18 mills for operating purposes on property that is not a principal residence, qualified agricultural property or qualified forest property (MCL 380.1211). Every rental, office and retail parcel in Michigan carries that levy, which is one reason the uncapped bill on investment property jumps more than it would on a home.
For a seller comparing a deeded Michigan replacement against a DST holding property elsewhere, the 18 mills plus uncapping are part of the true cost of staying in-state.
Replacement property
Exchanging into a DST leaves Michigan's uncapping and transfer tax behind
Exchanging into a Delaware Statutory Trust keeps the Michigan gain deferred at 4.25% with no state paperwork beyond the return, and because you receive a beneficial interest rather than a Michigan deed, the replacement side triggers no Michigan transfer tax, no Form 2766 and no uncapping.
Michigan residents pay Michigan tax on their share of the DST's rental income wherever the properties sit, and may also owe a nonresident return in states that tax that income; whether Michigan's credit for taxes paid to other states covers the overlap is a question for your CPA. Michigan itself imposes no claw-back, so when the DST eventually sells, the deferred Michigan gain is simply part of the federal gain at that time.
If the DST holds Michigan property, the trust's own acquisition already uncapped the taxable value and the non-homestead 18 mills are built into its expenses. Ask the sponsor for the property tax history, and confirm the state treatment with the Michigan Department of Treasury and your CPA before identifying; a cash-out DST or another of the investment types may fit if you want part of the proceeds now.
Questions investors ask about 1031 exchanges in Michigan
Will my Michigan property tax go up because I exchange?
Not for you. Uncapping affects the buyer of the property you sell; it affects you only if you buy deeded Michigan replacement property, which resets to SEV the following year.
Does Michigan withhold anything at closing when a nonresident sells?
No. There is no Michigan real estate withholding statute; a nonresident reports the gain, or the exchange, on a Michigan return for the year of sale.
Who pays Michigan's transfer tax in an exchange?
The seller, under MCL 207.523(2), at $3.75 state plus $0.55 county per $500. Sending the proceeds to a qualified intermediary instead of to you changes nothing about that.
Is Michigan's 2026 income tax rate still 4.25%?
Yes. Treasury confirmed on April 15, 2026 that the revenue trigger did not fire for tax year 2026, so the rate stays at 4.25%.
Can I sell my LLC instead of the building to avoid uncapping?
No. A transfer of more than 50% of the entity's ownership is a transfer of ownership under MCL 211.27a(6)(h), and the entity must notify the assessor within 45 days.
Does Detroit tax a nonresident's gain on a Detroit building?
The City Income Tax Act lets a city income tax reach a nonresident's capital gains from property located in the city. A completed exchange defers that gain, but rental profits while you own the property remain taxable in the city.
Sources
The rules above were checked against these publications on September 18, 2026. Rates and forms change; confirm the current version with your CPA and the Michigan tax agency before you close. This page is general information, not tax or legal advice.
- Michigan Dept. of Treasury, State Individual Income Tax Rate for 2026 Tax Year Determined
- MCL 206.30, Michigan Income Tax Act, definition of taxable income
- MCL 211.27a, taxable value, transfer of ownership
- MCL 211.27b, penalties for failure to notify assessor of transfer
- MCL 207.523, State Real Estate Transfer Tax Act, imposition and liability
- MCL 207.525, State Real Estate Transfer Tax rate
- MCL 380.1211, school operating mills and principal residence exemption
- MCL 141.613, City Income Tax Act, nonresident income subject to tax