Tax Ramifications for Buying & Selling a Home in Michigan

Buying or selling a home is a whirlwind filled with anticipation, imagining what’s to come, welcoming new beginnings — and lots and lots of paperwork. Whether you’re upgrading to your dream home, downsizing for a simpler life, or making an investment, the process of buying a home is decidedly exciting. But among that excitement, it’s crucial to understand the tax ramifications that accompany these significant transactions. Understanding the tax implications can help you make informed financial decisions, ensuring that your home buying or selling journey is not only thrilling but also financially savvy.

 

Taxes When Buying a Home in Michigan

These days, a lot of Americans are experiencing tax fatigue, and many homebuyers might become discouraged to discover certain taxes related to buying a home. To prepare yourself, it’s important to understand what’s to come.

Transfer Tax
In Michigan, a transfer tax is a fee imposed on the transfer of property ownership from one party to another. This tax is applicable to most real estate transactions and is typically calculated based on the property’s sale price. The responsibility for paying the transfer tax usually falls on the seller, although this can be negotiated between the buyer and seller during the sale process. Michigan’s transfer tax structure includes both a state and a county component. The state transfer tax rate is $3.75 for every $500 of the property’s value, while the county transfer tax rate is $0.55 per $500. In some cases, sellers may be eligible for refunds of the transfer tax after the sale, particularly if certain criteria are met, such as selling the property for less than its original purchase price.

Property Tax
Michigan property taxes are a recurring cost that every homeowner in Michigan has to pay, and they are typically looped into your mortgage payment. As such, these taxes can significantly impact the overall expense of owning a home. Property taxes are calculated based on the assessed value of the property and the local millage rate, which is the amount per $1,000 of property value used to calculate taxes owed.

Different counties have varying millage rates, meaning property tax bills can differ widely depending on the location of the home. To help homeowners estimate their potential property tax costs, Michigan provides tools like the State of Michigan property tax estimator. These resources can give prospective buyers a clearer picture of the long-term financial commitment of homeownership in different areas of Michigan.

 

Taxes When Selling a Home in Michigan

Just as buyers will be hit with certain taxes when purchasing a home in Michigan, sellers should also be aware of which taxes might come their way.

Capital Gains Tax Exclusion
Michigan capital gains tax is the tax placed on the profit you make from selling a home. When you sell a property for more than you paid for it, the difference (the gain) is subject to capital gains tax. This tax can vary depending on how long you owned the asset and your income level, and a Michigan capital gains tax calculator can help give you an idea of what figures you might be faced with.

The capital gains exclusion, on the other hand, is a specific provision that allows homeowners to exclude a certain amount of profit from the sale of their primary residence from being taxed as capital gains. For Michigan residents and others in the U.S., this exclusion is up to $250,000 for single filers and up to $500,000 for joint filers, provided they meet the ownership and occupancy requirements. This exclusion significantly reduces the amount of taxable capital gains from the sale of a primary home, which can result in substantial tax savings.

Other Potential Taxes
As we mentioned earlier, in some transactions, it can be negotiated to have the seller pay for the transfer tax, but there are a few other circumstances that might impact sellers in terms of taxes. For homeowners who haven’t lived in the property long enough to meet the eligibility requirements for the capital gains exclusion — typically two out of the last five years — the profit from the sale could be fully taxable as a capital gain. This means they would have to pay federal capital gains tax and Michigan state income tax on the entire gain from the sale.

Homeowners who have made substantial improvements to their property can add the cost of these improvements to their property’s basis (the original purchase price). This increases the basis and can reduce the amount of taxable capital gain when the property is sold. For instance, if you bought a home for $200,000 and made $50,000 worth of improvements, your adjusted basis would be $250,000. If you then sell the home for $300,000, your capital gain would be $50,000 instead of $100,000, potentially reducing your tax liability.

Sellers should also be aware of potential tax deductions related to selling expenses, such as real estate commissions, advertising, legal fees, and home staging costs. These expenses can be subtracted from the sale price, effectively reducing the amount of taxable gain — as long as you know what to look for and pay attention to as the seller.

 

Other Potential Taxes for Selling or Buying a Home

Outside of the standard transfer tax, property tax, and Michigan capital gains tax, there are some other tax-related scenarios that can implicate buyers or sellers.

Mortgage Interest Tax Deduction
Another important tax implication for sellers to consider is the federal tax deduction for mortgage interest. Homeowners can deduct the interest paid on their mortgage from their taxable income, which can significantly reduce their tax liability. This deduction is available for both primary and secondary homes, but there are limits on the amount of mortgage debt that qualifies for the deduction. It’s a valuable benefit that can make homeownership more affordable by lowering the overall cost of borrowing.

Given the complexity of tax laws and the potential for changes, it’s always advisable to consult a tax professional for detailed and personalized information rather than going at it alone. Navigating the tax implications of buying or selling a home can be complex, but you don’t have to do it alone. Partner with Treadstone to secure the best financing options tailored to your needs!

 

FAQs:

How much is the transfer tax in Michigan?
In Michigan, the transfer tax for real estate transactions is composed of both a state and a county component. The state transfer tax rate is $3.75 for every $500 of the property’s value. The county transfer tax rate is $0.55 for every $500 of the property’s value.

What if I haven’t lived in my Michigan home for the capital gains exclusion timeframe?
If you haven’t lived in your Michigan home for the required two out of the last five years to qualify for the capital gains exclusion, you may have to pay Michigan capital gains tax on the full profit from the sale. However, there are potential exceptions for circumstances such as a change in employment, health issues, or other unforeseen events that might allow for a partial exclusion. Consulting a tax professional can provide guidance specific to your situation.

Are there any tax breaks for first-time homebuyers in Michigan?
First-time homebuyers in Michigan may qualify for various tax breaks and incentives. These can include deductions for mortgage interest and property taxes, as well as potential benefits from programs like the Michigan State Housing Development Authority (MSHDA) down payment assistance program, which offers financial support for down payments and closing costs.

What are some other costs associated with buying or selling a home in Michigan?
When buying or selling a home in Michigan, additional costs to consider include closing costs, realtor fees, and moving expenses. Closing costs typically cover loan origination fees, appraisal fees, title insurance, and other administrative expenses. Realtor fees, usually paid by the seller, are often around 5-6% of the sale price.

This is not intended as tax advice. For tax information specific to your situation please contact a certified tax professional.