Selling a Rental Home With Tenants in Michigan: Leases, Showings, Deposits, and Taxes

If you own a rental in Mid-Michigan and you're thinking about selling, one of the first questions is what to do about the people living there. Do you wait for the lease to end? Can you show the home while they're in it? What happens to their security deposit? I own rentals myself, so these are questions I've had to think through personally, not just for clients.

Whether your rental is in Flint, Burton, Grand Blanc, Fenton, Davison, Flushing, Linden, Swartz Creek, Lapeer, or over in Livingston or Oakland County, here's what Michigan law says and how to plan a sale that's fair to your tenants and works for you.

The Lease Doesn't End Just Because You Sell

In Michigan, a tenancy is an interest in the property, and it generally takes priority over interests that come later. The Michigan Judicial Institute's landlord-tenant benchbook puts it plainly: if an owner leases a property and then sells it before the lease expires, the new owner is subject to the rest of the lease term (Michigan Judicial Institute, Residential Landlord-Tenant Law Benchbook, citing Plaza Investment Co v Abel, 8 Mich App 19 (1967)).

So if your tenant has a year-long lease with eight months left, a buyer takes the home with that lease in place. That shapes who your buyers are and when you list.

Three Ways to Time the Sale

1. Sell with the tenant in place

This works well when the buyer is an investor who wants a home that's already rented. Your rent roll, the lease, and a clean payment history become selling points. The buyer steps into your shoes as landlord when the sale closes.

2. Wait for the lease to end

If you want to sell to someone who plans to live in the home, many will want it empty at closing. Timing your listing around the end of the lease, or not renewing it, gives you a vacant home to prepare, stage, and show on your own schedule. My post on staging before you list covers what to do once it's empty.

3. Work out an early move-out with your tenant

You can't end a fixed-term lease early on your own just because you want to sell. But you and your tenant can agree to end it early, often with help on moving costs or a rent credit. If you go this route, put the agreement in writing, including the move-out date and how the deposit will be handled.

Month-to-Month Tenants and Notice

If your tenant is month-to-month, Michigan law lets either side end that kind of tenancy with notice. Under MCL 554.134, the general rule is 1 month's notice, and when rent is paid in periods shorter than 3 months, notice equal to the time between rent payments is enough. The notice ends the tenancy at the end of a period equal to that interval.

Notice rules have details that matter, and an eviction is a court process with its own requirements. If a tenant doesn't move out after proper notice, talk with a landlord-tenant attorney before doing anything else. Changing locks, removing belongings, or shutting off utilities to force someone out can expose you to damages under Michigan's anti-lockout law, MCL 600.2918.

Showing a Home While Tenants Live There

This is where a good relationship with your tenant pays off. Michigan Legal Help explains that a landlord can't enter a tenant's home without permission except in an emergency, and should give reasonable notice before entering for a needed repair (Michigan Legal Help: Tenant Rights and Responsibilities). Michigan's anti-lockout statute allows an owner to interfere with possession temporarily only as necessary for needed repairs or inspection and as provided by law, and that protection can't be waived in a lease (MCL 600.2918).

In practice, start with your lease's entry clause, then talk with your tenant before you list. A few things that help:

• Tell them early and explain what the sale means for their lease.
• Agree on showing windows that fit their work and family schedule, and give advance notice of every showing.
• Bundle showings into a few set times each week instead of a steady stream.
• Consider a thank-you, like a rent credit, for keeping the home show-ready.
• Use strong photos and a virtual tour so only serious buyers come through in person.

A tenant who feels respected is far more likely to keep the place tidy and say yes to showings. A tenant who feels blindsided can make a sale much harder.

What Happens to the Security Deposit

Michigan's security deposit rules are specific. Under MCL 554.614, when you sell, you stay liable for the tenant's deposit until one of these happens:

• You transfer the deposit to the new owner and notify the tenant in writing, by ordinary mail, of the transfer and the new owner's name and address.
• The new owner complies with the law's rules for holding deposits.
• You return the deposit to the tenant.

The Michigan Legislature's plain-language guide, Tenants and Landlords, walks through the same rules and reminds landlords that the deposit remains the tenant's property until the landlord establishes a right to it. In a sale, the deposit is often handled at closing, but make sure your purchase agreement spells it out and that the tenant gets that written notice.

Paperwork a Buyer Will Ask For

• A copy of the current lease and any amendments
• Rent amount, due date, and payment history
• The security deposit amount and where it's held
• Any promises you've made to the tenant, such as planned repairs or renewal terms
• Utility arrangements (who pays what)

If the home was built before 1978, the federal lead-based paint disclosure rules still apply to the sale (EPA: Real Estate Disclosures About Potential Lead Hazards). And my post on the Michigan Seller's Disclosure Statement explains the state form most sellers fill out.

Taxes Work Differently on a Rental

The $250,000 / $500,000 home sale exclusion is for your main home. If the property has been a rental, the IRS rules change in a few important ways (IRS Publication 523, Selling Your Home):

• Depreciation counts even if you didn't claim it. You reduce your basis by the depreciation you took or could have taken, and you can't exclude the part of your gain equal to depreciation after May 6, 1997.
• If you once lived there, you may still qualify for some or all of the exclusion, depending on how long you lived there in the 5 years before the sale and when it was rented.
• A like-kind (1031) exchange can defer gain when you trade investment property for other investment property, with its own strict rules (IRS Publication 544). Talk to a tax pro before you list, since the steps have to be set up ahead of closing.

For more on how gain is figured, see my post on the home sale capital gains exclusion, and for rental-specific rules see IRS Publication 527, Residential Rental Property.

A Simple Plan Before You List

1. Pull out the lease and note the end date, renewal terms, and entry clause.
2. Decide who your likely buyer is: an investor or someone who'll live there.
3. Talk with your tenant, then agree on showing times in writing.
4. Gather the lease, rent history, and deposit records.
5. Meet with your tax professional about depreciation and any 1031 plans.
6. Price it with the right comps. My pricing guide explains how.

Thinking About Selling Your Rental?

I'd be glad to walk through your lease, your timing, and your likely buyers with you, and help you plan a sale that's smooth for you and fair to your tenant. Call or text me at (810) 962-4908 and let's talk it through.

Kennedy Christensen, Tremaine Real Estate. This post is general information, not legal or tax advice. Laws change and every lease and situation is different, so talk with a real estate attorney about your lease and tenant questions, and a tax professional about your taxes.