Sooner or later every second-home owner in this market asks whether they'll owe tax when the cottage sells. The answer turns on one question that has nothing to do with the sale price: was it ever your main home?
The rule people half remember
Federal law lets you exclude up to $250,000 of gain on a home sale from your income, or $500,000 on a joint return. The word that gets skipped is "main." You have to have owned the home for at least 24 months of the 5 years before the sale, and lived in it as your residence for at least 24 months of those same 5 years. The months don't need to be consecutive. And if you're filing jointly and want the full $500,000, both spouses have to pass the use test on their own.
A cottage you open on Memorial Day and close up after Labor Day is a place you visit, and counting those summers toward the 24 months is how people end up surprised in the title office. I'm describing what the IRS publishes here, not telling you how to file your return, so run your own numbers past a CPA.
Where Northern Michigan owners trip on it
Selling the downstate house after you've moved up here full time usually works fine, because that was your main home. Selling the cottage you kept as a getaway usually doesn't get the exclusion at all, since it never was one.
Rentals are the next trap. If you've rented a place out (plenty of owners in Leelanau and Antrim counties do, and our short-term rental guide shows how the township rules differ), depreciation you claimed or were allowed to claim after May 6, 1997 gets recaptured, and Publication 523 says you can't exclude that portion of the gain. Owners who later move into the old rental to qualify run into a second rule: any period after 2008 when the property wasn't your principal residence is generally treated as nonqualified use, and the gain tied to those years can't be excluded.
There's also a look-back. If you excluded gain on a different home in the two years before this sale, the exclusion generally isn't available again, with exceptions spelled out in that same publication.
Inherited cottages are a different animal
If the cottage came to you after a parent died, your basis is generally the home's fair market value on the date of death, not what your parents paid in the 1970s (Publication 523 walks through this, including the surviving-spouse math). Sell it reasonably close to that value and there may be little gain to talk about. Sell it three years later after the lakefront market has moved, and the gain is measured from that stepped-up number. I don't know your family's situation and I'm not going to guess at it, but get the date-of-death appraisal if there's any chance you'll sell.
What doesn't go away on an inherited or gifted cottage is the property tax side. A transfer can uncap the taxable value, which we covered in the uncap post, and the state transfer tax that applies at sale is in this one.
Before you list
Pull your purchase closing statement and every receipt you can find for improvements: the new dock, the roof, the septic tank replacement. Count the months you actually lived there as a main home. If you're short of 24, ask your CPA whether a few more weeks changes the picture before the sign goes in the yard. That phone call costs little next to the number it could move.
If you're weighing a sale and want to talk through timing from the market side, reach out. We can pull recent comparable sales for your lake or road and tell you what's moving. The tax side stays with your CPA.
Checked against the sources linked above in October 2026.
Taylor Brown, Realtor
Taylor@taylorbrownrealtor.com
Text (231) 360-1510 or call (231) 403-0909
