1031 Exchange in Michigan
Michigan conforms to the federal like-kind exchange rules, so a properly structured 1031 exchange defers Michigan income tax on the same timeline as federal tax. Michigan does not have a state clawback provision, so it does not track and recapture deferred gain when you exchange into out-of-state property. Michigan taxes income at a flat rate — 4.25% for both the 2025 and 2026 tax years — and any gain that is recognized (such as boot) is taxed at that flat rate. Michigan does impose a State Real Estate Transfer Tax on most deed transfers.
Fast Facts
- State Income Tax on Capital Gains
- Michigan has a flat individual income tax rate of 4.25% (2025 and 2026 tax years). Capital gains are included in Michigan taxable income and taxed at that flat rate; Michigan does not apply the federal preferential long-term capital-gains rates.
- Conforms to Federal 1031
- Yes. Michigan's income tax base starts from federal adjusted gross income, so a valid federal like-kind exchange deferral flows through and defers Michigan tax on the same timeline.
- Clawback Rule
- No. Michigan has no clawback provision, so it does not add back deferred gain when Michigan property is exchanged into out-of-state replacement property.
- Non-Resident Withholding
- Michigan does not impose a state real-estate withholding at closing on nonresident sellers. Nonresidents still owe Michigan tax on Michigan-source gain and report it on a nonresident return, but a valid 1031 exchange defers the gain rather than recognizing it.
- Transfer Tax
- Michigan imposes a State Real Estate Transfer Tax (SRETT) of $3.75 per $500 of value (0.75%). Many counties also levy a County Real Estate Transfer Tax of $0.55 per $500. A 1031 exchange does not exempt the deed from these taxes.
Michigan Conforms to Federal 1031 — With No Clawback
Michigan’s individual income tax is built directly on top of the federal system. Under the Michigan Income Tax Act (MCL 206.30), a resident’s tax base begins with federal adjusted gross income (AGI) and is then modified only by the specific Michigan additions and subtractions the statute lists. There is no Michigan modification that disallows or reverses a Section 1031 like-kind exchange. As a result, when a properly structured exchange keeps the gain out of your federal AGI, that same deferral carries into your Michigan return automatically — you defer Michigan tax on the same timeline as federal tax.
Just as important is what Michigan does not do. A handful of states — California, Oregon, Massachusetts, and Montana among them — have enacted “clawback” rules that track deferred gain on in-state property exchanged for out-of-state replacement property and recapture it when the replacement property is eventually sold. Michigan is not one of those states. Michigan has no annual tracking form for out-of-state replacement property and no add-back mechanism, so a Michigan investor who exchanges into property in another state does not carry a residual Michigan tax liability tied to the original deferred gain. This makes Michigan comparatively straightforward for cross-state exchanges: follow the federal rules correctly, and the Michigan treatment follows along.
Michigan applies a single flat income tax rate of 4.25%, which the Michigan Department of Treasury confirmed remains 4.25% for both the 2025 and the 2026 tax years. Because Michigan does not use the federal long-term capital-gains brackets, any gain you do end up recognizing — for example, cash “boot” received in a partial exchange, or the full gain from a failed exchange — is simply added to your Michigan taxable income and taxed at 4.25%.
Legal and Tax Considerations
State Income Tax on Capital Gains
Flat 4.25% (2025 and 2026). Gains are taxed as ordinary income; no separate capital-gains rate.
Conforms to Federal 1031
Yes. Michigan's tax base starts from federal AGI, so the federal deferral flows through for Michigan purposes.
Clawback
None. Michigan does not track or recapture deferred gain on out-of-state replacement property.
Transfer Tax
State Real Estate Transfer Tax of $3.75 per $500 (0.75%), plus a common county tax of $0.55 per $500. Applies to the deed regardless of a 1031 exchange.
Required Documentation
- Federal Form 8824 (Like-Kind Exchanges), filed with your federal return
- Qualified Intermediary exchange agreement and assignment documents
- Complete closing/settlement statements for both the relinquished and replacement properties
- Michigan MI-1040 (residents) or MI-1040 with Schedule NR (nonresidents) reflecting the federal AGI flow-through
Clawback Rule
None
Official References
- MCL 206.30 — Michigan Income Tax Act: definition of taxable income (starts from federal AGI)
- Michigan Department of Treasury — State Real Estate Transfer Tax (SRETT)
- Michigan Department of Treasury — 4.25% Income Tax Rate for Individuals and Fiduciaries in 2026 Tax Year
- Michigan Department of Treasury — Individual Income Tax
- IRS Form 8824 — Like-Kind Exchanges
Michigan Transfer Tax and Sales Tax Context
Michigan does not tax the sale of real estate under its general sales tax, but it does impose transfer taxes when the deed is recorded. The State Real Estate Transfer Tax (SRETT) is levied at $3.75 per $500 of the property’s value (0.75%), collected by the county Register of Deeds when the deed is presented for recording. In addition, most counties impose a County Real Estate Transfer Tax of $0.55 per $500 (0.11%). Unless the parties agree otherwise, the seller is customarily responsible for the transfer tax.
A 1031 exchange is a federal income-tax deferral mechanism — it does not exempt a Michigan deed from these transfer taxes. When you sell the relinquished Michigan property, and again when you record any Michigan replacement property, the ordinary transfer-tax rules apply. There are statutory exemptions from SRETT (for example, certain transfers with consideration under $100), but the like-kind character of the transaction is not by itself an exemption. Investors should budget transfer tax as a normal closing cost on each Michigan leg of an exchange and confirm the current rate and any exemptions with the county Register of Deeds or the Department of Treasury’s SRETT page before closing.
Step-by-Step Process
- 1
Engage a Qualified Intermediary Before Closing
For a delayed exchange, set up a Qualified Intermediary (QI) before you close on the relinquished Michigan property. You cannot take actual or constructive receipt of the sale proceeds — the QI holds the funds and assigns the exchange agreements.
- 2
Sell the Relinquished Property
Close the sale with the QI receiving the proceeds. The county collects the State Real Estate Transfer Tax on the deed at recording. You will report the disposition on federal Form 8824, and the deferred gain flows through to your Michigan return via federal AGI.
- 3
Identify Replacement Property Within 45 Days
You have 45 calendar days from the sale of the relinquished property to identify potential replacement property in writing, following the federal identification rules (such as the three-property rule or the 200% rule).
- 4
Close on Replacement Property Within 180 Days
You must acquire the replacement property within 180 calendar days of the sale (or your tax-return due date including extensions, if earlier). Only real property held for investment or business use qualifies under post-2017 federal law.
- 5
File Federal and Michigan Reporting
Report the exchange on federal Form 8824. Because Michigan's tax base starts from federal AGI, the deferral carries into your MI-1040 automatically, and there is no separate Michigan clawback form to track. Any recognized boot is taxed at Michigan's flat 4.25% rate.
Timeline Calculator
Enter the closing date of your relinquished property to calculate your 1031 exchange deadlines:
Frequently Asked Questions
Yes. Michigan's individual income tax base begins with federal adjusted gross income under the Michigan Income Tax Act (MCL 206.30), and there is no Michigan modification that reverses a Section 1031 exchange. So a valid federal like-kind exchange defers Michigan income tax on the same timeline as federal tax.
No. Michigan does not have a clawback provision. Unlike California, Oregon, Massachusetts, and Montana, Michigan does not track deferred gain when you exchange Michigan property into out-of-state replacement property, and it does not add that gain back to Michigan income when the out-of-state property is later sold.
Michigan has a flat individual income tax rate of 4.25% for both the 2025 and 2026 tax years, confirmed by the Michigan Department of Treasury. Capital gains are included in Michigan taxable income and taxed at that flat rate — Michigan does not use the federal preferential long-term capital-gains rates. So any gain you recognize, such as cash boot in a partial exchange or gain from a failed exchange, is taxed at 4.25%.
No. A 1031 exchange defers income tax, not transfer tax. Michigan imposes a State Real Estate Transfer Tax of $3.75 per $500 of value (0.75%), and many counties add $0.55 per $500. These apply when the deed is recorded regardless of whether the transaction is part of a like-kind exchange. Confirm current rates and any exemptions with the county Register of Deeds.
Michigan does not impose a state real-estate withholding at closing on nonresident sellers the way some states do. A nonresident still owes Michigan tax on Michigan-source gain and reports it on a nonresident return, but a properly structured 1031 exchange defers that gain rather than recognizing it. Consult a Michigan tax professional about your filing obligations.
Related Guides
- What Is a 1031 Exchange? — the complete federal framework, deadlines, and rules
- 1031 Exchange by State — compare Michigan with other states’ rules and clawback provisions
- Ann Arbor, MI
- Battle Creek, MI
- Bay City, MI
- Detroit-Warren-Dearborn, MI
- Flint, MI
- Grand Rapids-Wyoming, MI
- Kalamazoo-Portage, MI
References
Official References
- MCL 206.30 — Michigan Income Tax Act: definition of taxable income
- Michigan Department of Treasury — State Real Estate Transfer Tax (SRETT)
- Michigan Department of Treasury — 4.25% Income Tax Rate for 2026 Tax Year
- Michigan Department of Treasury — Individual Income Tax
- IRS Form 8824 — Like-Kind Exchanges
This information is for educational purposes only and is not legal or tax advice. Consult with qualified professionals regarding your specific situation.