Michigan Capital Gains Tax, Explained

Michigan runs a flat individual income tax rate, and for the 2026 tax year that rate is 4.25%. It applies to every dollar of ordinary income, wages, business income, and capital gains alike. There's no separate capital gains schedule the way the federal system has one.

The rate wasn't always a clean, boring 4.25%, though, and the story matters if you sold anything in 2023. A 2015 state law ties Michigan's income tax rate to a formula: when state revenue growth outpaces inflation by enough, the rate drops. That trigger fired for 2023, cutting the rate from 4.25% to 4.05% for that year alone.

The dispute was whether that cut was permanent or a one-year event. The state treasurer's office read the statute as a one-time rollback, meaning the rate would snap back to 4.25% for 2024. Business groups and some state lawmakers sued, arguing the law meant any reduction should carry forward permanently. A Michigan Court of Claims judge sided with the state in December 2023, the Michigan Court of Appeals unanimously affirmed that reading in March 2024, and the Michigan Supreme Court let it stand. The rate has been 4.25% every year since, including 2026, where the treasurer's office confirmed in April 2026 that revenue growth wasn't sufficient to trigger another cut.

What it means in dollars: sell for a $150,000 gain in a 4.05% year and Michigan's cut is $6,075. Sell the identical gain in a 4.25% year and it's $6,375, a $300 difference on a mid-size gain that got a lot more attention than $300 usually deserves, because for a while nobody was sure which rate would apply. If you filed a 2023 return, that's the year the 4.05% rate was in effect. Every other recent year, including 2026, use 4.25%.

The federal system sorts gains into buckets: short-term gains at your ordinary federal bracket, long-term gains (held over a year) at 0%, 15%, or 20%, with the 3.8% net investment income tax layered on above $200,000 single or $250,000 married filing jointly MAGI. Michigan skips all of that nuance and taxes the whole gain, short or long-term, at the flat 4.25%.

Worked example: a Michigan couple with $180,000 of W-2 income sells stock held three years for a $100,000 long-term gain. That gain sits in the 15% federal bracket and their MAGI stays under the $250,000 NIIT threshold, so the math is two lines: federal $100,000 x 15% = $15,000, Michigan $100,000 x 4.25% = $4,250. Combined: $19,250, about 19.25% all-in. Push the same gain over the NIIT threshold and add another $3,800 (3.8% x $100,000) to the total.

Because Michigan's return starts from your federal adjusted gross income, moves that shrink the federal number generally shrink the Michigan number in the same motion. Loss harvesting, timing a gain into a lower-income year, and installment sales all do double duty, with no separate Michigan election to file. Run the full stack in our capital gains tax calculator, and see current federal thresholds in the federal brackets guide.

Michigan is one of the states where cities can layer their own income tax on top of the state's. Roughly two dozen Michigan cities do it, under a uniform statute that standardizes the rules. Detroit has the highest rate in the state: 2.4% for residents and 1.2% for nonresidents (on income tied to work performed within city limits). Most other taxing cities charge closer to 1% for residents; Grand Rapids and Saginaw sit at 1.5%.

For capital gains specifically, city income tax generally follows the same base as your state return, so a Detroit resident's investment gains are subject to the 2.4% city rate along with the 4.25% state rate. That turns the earlier two-layer stack into three:

On the federal side, a rental sale splits into layers: the depreciation you claimed comes back as recapture at up to 25%, the remaining gain gets long-term rates, and the NIIT can ride on top. Michigan flattens all of it, recapture and appreciation alike, into ordinary income at 4.25%.

Worked example: you sell an Ann Arbor rental for a $200,000 total gain, of which $60,000 is depreciation recapture, and the remaining $140,000 falls in your 15% federal bracket. Federal: $60,000 x 25% = $15,000, plus $140,000 x 15% = $21,000, $36,000. Michigan: $200,000 x 4.25% = $8,500, no separate recapture rate, no separate schedule. Combined: about $44,500 before any NIIT, and add city tax if the property (and you) are inside a taxing city.

The planning lever is the same one that works everywhere: because Michigan's bill scales with the total gain rather than its character, the state layer is mild and predictable. The federal 25% recapture rate is where the real cost sits, which makes sizing your accumulated depreciation before you list the property the useful homework. A 1031 exchange, if it fits the situation, generally carries the Michigan deferral along with the federal one since Michigan's return starts from federal AGI.

Michigan has one of the largest concentrations of lake and vacation property in the country, thanks to the Great Lakes shoreline and thousands of inland lakes. A lot of that property has appreciated heavily over the years it's been held, which means a sale can produce a large gain even when the owner never treated it as a rental or a business.

The distinction that matters most is whether the property was your primary residence or a second home. The federal home sale exclusion, which shelters up to $250,000 of gain for a single filer or $500,000 for a married couple, only applies to a home that passes the ownership-and-use tests for your primary residence. A cottage Up North that's always been a second home doesn't qualify, even if you've owned it for decades and love it more than your actual house. Every dollar of that gain is taxable, federal and Michigan both, with no exclusion cushion.

If the lake property was ever rented out, even informally through a booking platform, the analysis shifts again toward the short-term rental rules and depreciation recapture covered above. Michigan's rate doesn't change either way, it's 4.25% on the gain regardless of how the property was used, but the federal side (recapture exposure, whether losses were deductible against other income, whether the sale is investment property or a personal-use asset) changes substantially based on that history.