We buy a lot of rentals from Michigan landlords who are done, and the same two surprises come up in almost every conversation: the tax bill and the tenant timing problem. Here is what we wish every landlord knew a year before selling. The usual caveat applies, we are investors, not accountants, so confirm your specifics with a tax professional.
Depreciation Recapture: The Tax Everyone Forgets
Every year you owned the rental, you deducted depreciation, roughly one twenty seventh of the building value annually, whether you remembered to or not, the IRS assumes you took it. At sale, that depreciation gets recaptured and taxed at up to 25 percent. Own a $150,000 rental for fifteen years and you may have $60,000 plus of accumulated depreciation, meaning up to $15,000 of recapture tax before regular capital gains are even counted. Sellers who skip this math get genuinely shocked at tax time.
Capital Gains and the Exclusion You Probably Lost
The $250,000 single or $500,000 married home sale exclusion requires the house to have been your primary residence for two of the last five years. A long term rental does not qualify. Gains above your adjusted basis get taxed at capital gains rates, on top of recapture. A 1031 exchange defers all of it but requires buying another investment property on a strict timeline, 45 days to identify, 180 to close.
Occupied or Vacant: The Pricing Fork
Selling vacant gets retail buyers but costs you months of lost rent, turnover work, and Michigan eviction timelines if the tenant does not leave by choice. Selling occupied keeps the income but shrinks the buyer pool to investors, who price on the numbers: rent roll, payment history, lease terms. A paying tenant on a market rate lease is an asset to an investor buyer. A nonpaying tenant is a discount, but, and this surprises people, not a dealbreaker. We buy occupied rentals in both situations and price the difference openly.
The Clean Exit Math
Stack it up: recapture, capital gains, commission if listed, repairs a retail buyer demands that a tenant lived around, and months of carrying costs through the process. Then compare a direct sale: tenant stays through closing, no commission, no repairs, close in two weeks, taxes identical either way. The retail route still wins for updated houses with cooperative vacancies. For everything else, the gap is thinner than the list price suggests. Get both numbers, ours takes a day through the offer form, and our comparison math shows how to line them up.