Do You Pay Sales Tax on a House in Michigan?

When considering the purchase or sale of a home in Michigan, individuals often encounter questions about the various taxes that apply to real estate transactions and ownership. Understanding these financial obligations is an important part of navigating the housing market. This guide clarifies the tax landscape surrounding residential properties in Michigan, addressing common misconceptions and detailing the specific taxes homeowners encounter.

Sales Tax and Real Estate in Michigan

In Michigan, sales tax does not apply to the sale of real property, such as a house or land. Sales tax is typically imposed on tangible personal property and certain services. A real estate transaction involves the transfer of immovable property, which is different from the sale of goods or taxable services. Therefore, the direct purchase price of a home is not subject to Michigan sales tax. This clarifies why a sales tax line item will not appear on closing documents for a home purchase.

Michigan Real Estate Transfer Taxes

While sales tax does not apply to real estate, Michigan imposes a real estate transfer tax when property ownership changes hands. This tax is a fee collected on the transfer of the property title from the seller to the buyer. It comprises both a state and a county component.

The state real estate transfer tax is assessed at a rate of $3.75 for every $500 of the property’s value. Counties levy their own transfer tax at a rate of $0.55 per $500 of value. This combined rate means the total transfer tax amounts to $4.30 per $500 of the sale price. These taxes are the seller’s responsibility, but the parties can negotiate who pays as part of the purchase agreement. The transfer tax is paid at the time of closing.

Certain transactions may qualify for exemptions from the Michigan real estate transfer tax. Transfers where the value of consideration is less than $100 are exempt. Exemptions apply to transfers between spouses or certain direct family members. While transfer taxes are not deductible on annual income tax returns, they can be added to the property’s cost basis, which may reduce future capital gains tax liabilities upon resale.

Ongoing Property Tax Obligations

Beyond transaction-based taxes, owning a home in Michigan incurs ongoing property tax obligations. These annual taxes are distinct from sales or transfer taxes and contribute to funding local government services, including schools, roads, and public safety. Property taxes are calculated based on a property’s taxable value and the local millage rates.

Michigan law establishes two primary valuation figures for property: assessed value (AV) and taxable value (TV). The assessed value, also known as State Equalized Value (SEV), represents 50% of a property’s estimated market value. Property taxes are levied on the taxable value, which is lower than the assessed value. The taxable value is capped, meaning its annual increase is limited to the lesser of 5% or the rate of inflation.

When a property is sold or transferred, its taxable value “uncaps” and resets to the assessed value (SEV) for the year following the transfer of ownership. This means new homeowners might see a significant increase in their property tax bill compared to the previous owner.

Homeowners in Michigan may be eligible for the Principal Residence Exemption (PRE), which can reduce their property tax burden. This exemption applies to a homeowner’s primary residence and exempts it from a portion of the local school operating taxes, up to 18 mills. To qualify for the PRE, a property must be owned and occupied as the principal residence by May 1st of the year for which the exemption is claimed. Homeowners must file a Principal Residence Exemption Affidavit (Form 2368) with their local assessor’s office to receive this benefit.