How Capital Gains Taxes Work When You Sell a Home in Rochester, MI

When you sell a home in Rochester, MI, it can be exciting to see how much your property has appreciated. But before you count your profits, it’s important to understand how capital gains taxes work and how to determine whether you’ll owe anything to the IRS—or whether you qualify for an exemption that allows you to keep more of your money.

What Is Capital Gains Tax?

Capital gains tax is a federal tax on the profit earned when you sell an asset such as real estate, stocks, or other investments for more than you paid for it. In real estate, the taxable amount is based on the difference between your home’s sale price and its adjusted cost basis—the purchase price plus any qualifying home improvements, closing costs, or selling expenses.

If you purchased your home several years ago, rising property values in Rochester and across Oakland County may mean your sale price is significantly higher than what you originally paid. That gain may be subject to taxation, but many homeowners qualify for exclusions that reduce or eliminate the tax entirely.

The Primary Residence Exemption

Most homeowners selling their primary residence can qualify for what’s known as the Section 121 Exclusion, which allows you to exclude a portion of your gain from federal taxes if you meet specific requirements.

You may be able to exclude up to:

• $250,000 of the gain if you file as a single individual

• $500,000 of the gain if you file jointly as a married couple

To qualify for this exemption:

1. You must have owned the home for at least two years.

2. You must have lived in the home as your primary residence for at least two of the last five years before the sale.

3. You cannot have used this exclusion on another property within the past two years.

For many Rochester homeowners, this exemption means that selling a primary residence produces no taxable gain at all.

Investment and Rental Properties

If you’re selling a second home, rental property, or investment property, capital gains tax generally applies because these properties do not qualify for the primary residence exclusion. However, real estate investors can take advantage of a 1031 exchange, which allows you to defer paying taxes if you reinvest your proceeds into another similar property within a specific timeframe.

There are two main types of capital gains to be aware of:

• Short-term capital gains apply when you’ve owned a property for less than one year. These are taxed at your regular income tax rate.

• Long-term capital gains apply when you’ve owned the property for more than one year. These are taxed at rates between 0% and 20%, depending on your income bracket and filing status.

Understanding which category applies to your situation can help you plan the timing of your sale for maximum tax efficiency.

How to Prepare Before Selling

Tax planning should start well before listing your home. Here are a few ways to reduce potential tax liability and avoid unexpected costs at closing:

• Keep records of home improvements. Renovations such as roof replacements, kitchen remodels, or new HVAC systems increase your home’s cost basis and lower your taxable gain.

• Factor in selling expenses. Real estate commissions, title fees, and closing costs can also be deducted from your gain.

• Consult with a qualified tax advisor. A local professional familiar with Michigan tax laws can help you calculate your estimated capital gains and determine the best time to sell.

• Consider timing your sale. Selling in a year when your overall income is lower can reduce your capital gains tax rate.

Why This Matters for Rochester Homeowners

The Rochester housing market has remained strong, with many homeowners seeing significant appreciation in property value. Understanding how capital gains taxes work ensures you’re not caught off guard when selling your home. Whether you’re moving up, downsizing, or selling an investment property, having a plan can protect your profits and help you make informed financial decisions.

If you’re thinking about selling a home in Rochester, MI and want help estimating your potential gains—or want a referral to a trusted local tax professional—The Delia Group can help. Our team works closely with Rochester homeowners to guide them through the financial and logistical details of selling a home successfully.