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By the Ann Arbor Insights Editorial Team
In Ann Arbor’s strong housing market, selling a home can feel like a guaranteed financial win. But for many long-time Michigan homeowners, that “win” comes with complicated tax rules that are easy to overlook.
Between federal capital gains rules, Michigan’s 4.25% flat income tax, and the state’s unique property tax structure, what looks like a straightforward sale can quickly become a strategic tax decision.
If you’re planning to sell your Michigan home in 2026, here are three common tax traps that surprise even experienced homeowners.
1. The “2-Out-of-5 Year” Residency Rule
One of the most valuable tax benefits available to homeowners is the federal Section 121 capital gains exclusion. This rule allows homeowners to exclude up to $250,000 in profit (single filers) or $500,000 in profit (married filing jointly) from federal taxes when selling a primary residence.
Where Homeowners Get Confused: To qualify, you must have lived in the home as your primary residence for at least 24 months during the previous five years before the sale. These months do not have to be consecutive. For example, if you lived in the home for three years, rented it out while working elsewhere, and moved back before selling, you may still qualify.
The 2026 Reality in Ann Arbor: In high-appreciation neighborhoods such as Burns Park, Water Hill, and parts of the Old West Side, many homeowners now exceed the $500,000 threshold. Any gain above that amount may be taxed at 15%–20% federally, plus Michigan’s 4.25% state tax.
2. The Michigan Property Tax “Uncapping” Surprise
Under Proposal A, a home’s taxable value increases only with inflation (capped at 2.7% for 2026). When a property transfers ownership, however, that taxable value “uncaps” and resets to roughly 50% of the current market value.
The Real-World Impact: If you have owned your home since the early 2010s, your taxes are likely based on a very low "capped" value. When you purchase your next home today, the tax bill will reset based on 2026 prices. For many moving within Washtenaw County, property taxes can double or even triple overnight. Factoring this into your next housing budget is essential.
3. Partial-Year Residency & Moving Out of State
Many Ann Arbor homeowners sell when relocating to another state, but changing your mailing address doesn't always simplify the tax treatment.
The Key Rule: Michigan taxes capital gains as ordinary income. If you sell a Michigan home during the same year you establish residency elsewhere, the state generally still considers the gain Michigan-sourced income. As a result, Michigan may still claim its 4.25% share of the gain.
Strategy Checklist for 2026 Sellers
Gather Documentation: Collect receipts for major improvements (roofs, kitchens, additions). These increase your "basis" and reduce your taxable gain.
Confirm Your Residency Timeline: Ensure you hit the 24-month mark before closing to protect your exclusion.
Estimate Your Next Bill: Use a local tax estimator for your target neighborhood to see the "post-uncapping" level before you buy.
Looking for a Local CPA or Tax Strategist? Ann Arbor Insights is currently vetting financial professionals who specialize in Michigan real estate transitions for our upcoming 2026 Wealth Series.
Ann Arbor Insights periodically features licensed professionals for educational interviews.
Editorial Disclaimer: This article is for informational purposes only and does not constitute tax or legal advice. Capital gains laws and state tax interpretations are subject to change. Readers should consult with a qualified CPA or tax professional regarding their specific financial situation. Comments for this article have been disabled.
