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If you've lived in the home as your primary residence for 2 of the last 5 years, you can exclude up to $250,000 in gains ($500,000 married filing jointly) from federal capital gains tax. Michigan's state income tax (4.25%) also applies to any taxable gain after the exclusion.
Michigan charges a state transfer tax of $3.75 per $500 of the sale price, plus a county transfer tax (varies by county, typically $1.10 per $1,000). On a $200,000 sale: approximately $1,500 state + $220 county = $1,720 total. This is typically the seller's responsibility.
Selling costs (agent commissions, closing costs, legal fees) reduce your taxable gain but are not directly deductible on your return. You subtract them from your sale price to arrive at your net proceeds, which reduces capital gains. Keep all closing documents for tax purposes.
Inherited property receives a stepped-up cost basis to fair market value at date of death. This means most heirs owe little or no capital gains tax if they sell soon after inheriting. Michigan has no inheritance tax or estate tax.
In a short sale, the forgiven debt may be treated as taxable income (cancellation of debt income). However, you may qualify for exclusions if the property was your primary residence (under the Mortgage Forgiveness Debt Relief Act) or if you were insolvent at the time. Consult a CPA before proceeding.
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