15.4% of Homeowners in Michigan Will Face a Hidden Home Equity Tax If They Sell

Thousands of Michigan homeowners are facing a costly surprise when they decide to sell. According to new data from the National Association of REALTORS®, 15.4% of households across the state now exceed the federal capital gains exemption—an outdated tax rule that hasn’t been adjusted in nearly 30 years.

This “hidden home equity tax” is a growing problem for longtime owners who bought modest homes decades ago but are now being penalized for staying put.

For those in Michigan, hoping to make a killing with selling their homes that have appreciated in value in the last few years, this is important information to consider before putting your home on the market. Because in truth, equity-rich owners across Grand Rapids, Ann Arbor, and beyond will feel the squeeze when it comes time to sell if the situation doesn’t change.

The tax cap that stalled out

Federal law allows homeowners to exclude up to $250,000 in profit from the sale of a primary residence if filing singly—or $500,000 for married couples. These caps were set in 1997 and never tied to inflation.

Since then, U.S. home prices have increased over 260%. In Michigan, the average appreciation for homes over the exemption is $167,810, and for those over the $250,000 limit, the average taxable gain is $94,827. For the 2.3% of homeowners who exceed the $500,000 threshold, the average gain is $137,702, resulting in a federal tax liability of approximately $23,253.

Michigan taxes capital gains as income at a flat rate of 4.05%, further adding to the potential cost of selling.

Michigan’s risk is growing

Michigan’s 15.4% exposure rate is relatively moderate compared to states like Massachusetts (62.3%) or California (62.2%), but it’s not insignificant. With nearly half a million homes already over the exemption threshold, many sellers could find themselves unexpectedly facing a tax bill.

This issue is particularly acute in long-held family homes across suburban Detroit, Grand Rapids, and Ann Arbor, where values have appreciated steadily over time.

The Next Decade Will Bring Bigger Bills

According to NAR, by 2035, nearly 70% of all U.S. homeowners may exceed the $250,000 exemption, and over 38% may surpass $500,000.

That means more Michigan homeowners will face what economists call the “stay-put penalty”—where families delay downsizing or relocating to avoid a capital gains hit. This compounds the state’s inventory crunch and makes it harder for first-time buyers to find homes. Additionally, according to NAR projections, that 38% of Michigan homeowners will exceed the $250,000 exclusion in the next decade, while 8.2% will cross the $500,000 mark.

But there is hope. Federal lawmakers have introduced the More Homes on the Market Act, which would double the exemption and tie it to inflation.

Until then, Michigan homeowners should understand: that equity they’ve built could come with a federal—and state—price tag if they choose to sell.

This article was produced with editorial input from Dina Sartore-Bodo, Gabriella Iannetta, and Allaire Conte.