Capital Gains Tax on Inherited Property in Michigan

Understanding the Step-Up in Basis and Tax Implications

Losing a loved one is never easy.

The emotional toll can feel overwhelming, especially when their passing leaves you responsible for managing an inherited home in Michigan. In addition to the grief, you're suddenly faced with legal documents, property upkeep, and financial decisions.

One of the most common — and confusing — questions is whether you’ll owe taxes if you decide to sell the home.

Many families are surprised to learn that capital gains taxes may apply, depending on the home’s value and the timing of the sale. If you're unsure where to begin, you're not alone.

Let’s walk through what you need to know.

What This Topic Means in Michigan

nheriting property comes with a key tax advantage called the step-up in basis. This term refers to how the IRS — and Michigan — adjust the value of inherited property. Instead of using the price your loved one originally paid for the home, the property’s tax basis is reset to its fair market value (FMV) at the date of death. For example, if your mother purchased a home in the 1980s for $90,000 and it was worth $240,000 at the time of her death, your basis becomes $240,000.

This matters because when you sell the property, your taxable capital gain is the difference between the sale price and your adjusted basis. If you sell it soon after inheriting, and the value hasn’t changed much, your gain may be minimal—or even zero.

Michigan follows these federal rules closely. Your capital gains from the sale will be reported on your federal return and then carried over to your Michigan income tax return. Michigan taxes this gain at a flat 4.25% rate.

To better understand the federal rule, visit IRS Topic No. 703 - Basis of Inherited Property, which explains how step-up basis works. The MI-1040 instruction booklet outlines how Michigan applies the same principles for state tax reporting.

How This Affects Selling an Inherited Home

The step-up in basis provides significant tax relief, but the final amount you pay (if any) depends on your situation. Here are the main factors that affect how much tax you might owe:

Timing of the sale: If you sell the home soon after inheriting it, and the value hasn’t increased significantly, you may avoid capital gains entirely.
Home appreciation: If the home increases in value between the date of death and the date of sale, you’ll owe tax on that gain.
Improvements and expenses: Any documented improvements (like replacing a roof, kitchen remodels, or major repairs) can increase your basis, lowering your taxable gain.
Filing obligations: Regardless of whether tax is owed, you must still report the sale using IRS Form 8949 and Schedule D. For Michigan, use Form MI-1040 or MI-1040NR if you’re not a resident.

Many sellers assume they don’t need to report anything if there’s no gain—but both the IRS and Michigan require reporting. Failing to include the sale could trigger unnecessary tax notices or delays in processing your return.

Common Scenarios You May Be Facing

Scenario 1: Selling soon after inheritance
You inherit a home in Grand Rapids that’s appraised at $250,000 on the date of death. You sell it two months later for $252,000. Because the step-up basis is $250,000, your taxable gain is only $2,000. You report this on your tax return, but the tax impact is minimal.

Scenario 2: You hold the home and make improvements
You inherit a Detroit home worth $140,000. You live in it for a few years and invest $30,000 in improvements. When you sell it for $210,000, your adjusted basis is $170,000. That leaves a $40,000 gain, which is subject to both federal capital gains tax and Michigan’s flat tax.

Scenario 3: The home’s value drops
If the home was worth $120,000 at the time of death, even though it was purchased for $160,000, your basis is $120,000. If you later sell it for $110,000, you report a capital loss, which may help offset other taxable gains.

Scenario 4: You live out of state
You’re based in Illinois but inherit a house in Ann Arbor. After selling the property, you’re required to file a Michigan nonresident return (MI-1040NR) and pay state tax on the Michigan-sourced gain—even though you don't live in the state.

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What Are Your Options?

If you’re trying to reduce tax exposure or simply want to avoid surprises, here are several practical tips:

Sell promptly if you're ready. Doing so shortly after inheriting often means you’ll sell at or near the stepped-up value, which can eliminate taxable gains.
Document all improvements. Renovation expenses can increase your basis and lower your gain—but only if you have receipts.
Consider the alternate valuation date. If the estate qualifies and files IRS Form 706, the executor may choose a valuation date six months after death. This can be useful if the property’s value declined.
Use state credits. Some heirs may qualify for Michigan’s Homestead Property Tax Credit using Form MI-1040CR if they’ve lived in the property and meet income guidelines.
Consult a tax professional. Especially in cases involving trusts, tenants, farmland, or multiple heirs, having a CPA or estate attorney on your side can ensure accurate filings and reduce risk.

Selling inherited property is never one-size-fits-all. The more informed you are, the better decisions you can make. Being proactive now can save you thousands later.

Final Thoughts

If you’re juggling more than just taxes—such as probate, sibling negotiations, or whether to repair or sell as-is—check out our detailed guide on Selling an Inherited House in Michigan. It’s full of step-by-step help for Michigan families navigating this exact situation.

Whether you're facing delays or disputes, you'll find practical answers there.

Selling an inherited property can feel overwhelming, but you don’t have to navigate it alone. Michigan’s tax rules are relatively straightforward once you understand the step-up in basis, your sale timeline, and how to document expenses. Even if you’re not sure whether to keep the property, rent it, or sell it, getting educated now puts you in control.

Take the time to organize your documents, ask questions, and connect with professionals who specialize in Michigan real estate and tax law.

You're already doing the hard work—and now you're equipped with the facts.

With clarity and the right support, you can handle this next step with confidence.

"When you mentioned that you would give us an offer within 24 hours and then close quickly I didn’t really believe that we would have the house sold in only 2 weeks. I’m glad I found you.”

Michelle L. - Michigan

Capital Gains Tax on Inherited Property in Michigan

Do I pay capital gains tax when I sell inherited property in Michigan?
If you sell the home for more than its stepped-up basis (its value at the time of inheritance), yes, you may owe capital gains tax. Michigan taxes gains at 4.25%.

How can I avoid paying capital gains tax on inherited property?
Sell quickly, before the home appreciates. Also, track and add improvement costs to your basis to reduce gains. Use the step-up provision to your advantage.

What is the step-up in basis in Michigan?
It resets the property’s cost basis to its fair market value at the date of death. Michigan honors the federal step-up rule and applies it for state tax reporting too.

Do I have to report the sale of inherited property if there’s no gain?
Yes. The IRS still requires reporting on Form 8949 and Schedule D, and Michigan requires it on your MI-1040, even if the sale results in no taxable gain.

What if I live outside Michigan and sell an inherited home here?
You must file a Michigan nonresident tax return (MI-1040NR) and pay Michigan’s 4.25% income tax on the gain, since the property is located in the state.

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“Mr. Fassett – thank you for working with us to buy my Mom’s home after she passed away. When you mentioned that you would give us an offer within 24 hours and then close quickly I didn’t really believe that we would have the house sold in only 2 weeks. I’m glad I found you.”

Michelle L. - Michigan

“Thanks for buying my Mother’s home. It was a big help that you were able to buy it without us having to clean it out and get it ready to sell. My mother had accumulated lots of stuff and after the stress of her long illness I was exhausted and I dreaded dealing with all of it. I also liked it that you gave me a very fair price for the home. I’m on a fixed income and that really helped a lot.”

Henry G. - Michigan

“Dennis – thank you for helping us with our Mom’s home. This was a very traumatic experience for us, and we appreciated your patience with all the emotions we experienced during the process. You were really patient and understanding with us during the sale process, and we’re sure that Mom’s home will be in good hands. God Bless.”

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We Help Michigan Families Navigate These Situations Every Day

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At Dennis Buys Houses, we’re not just cash buyers — we’re trusted problem-solvers who help Michigan families find real answers during difficult times.

Since 2004, we've been helping homeowners across Michigan sell their properties quickly and easily—without the stress of agents, repairs, or hidden fees.

We’re a family-owned, local business with deep roots in the community. Over the years, we’ve helped hundreds and hundreds of homeowners in situations just like yours—whether they’re dealing with delinquent property taxes, foreclosure, or simply needing a fresh start.

If you're dealing with a tough family situation and don’t know where to turn, we’re here to help.

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