diff --git a/sqlmodel/main.py b/sqlmodel/main.py
index 9a1a676775..33023eec74 100644
--- a/sqlmodel/main.py
+++ b/sqlmodel/main.py
@@ -15,6 +15,7 @@
     ClassVar,
     Literal,
     TypeAlias,
+    TypedDict,
     TypeVar,
     Union,
     cast,
@@ -22,7 +23,7 @@
     overload,
 )
 
-from pydantic import BaseModel, EmailStr
+from pydantic import BaseModel, EmailStr, create_model
 from pydantic.fields import FieldInfo as PydanticFieldInfo
 from sqlalchemy import (
     Boolean,
@@ -49,7 +50,7 @@
 from sqlalchemy.orm.instrumentation import is_instrumented
 from sqlalchemy.sql.schema import MetaData
 from sqlalchemy.sql.sqltypes import LargeBinary, Time, Uuid
-from typing_extensions import deprecated
+from typing_extensions import Unpack, deprecated
 
 from ._compat import (
     PYDANTIC_MINOR_VERSION,
@@ -801,6 +802,22 @@ def get_column_from_field(field: Any) -> Column:
 _TSQLModel = TypeVar("_TSQLModel", bound="SQLModel")
 
 
+class _ModelDumpKwargs(TypedDict):
+    mode: Literal["json", "python"] | str
+    include: IncEx | None
+    exclude: IncEx | None
+    context: Any | None  # v2.7
+    by_alias: bool | None
+    exclude_unset: bool
+    exclude_defaults: bool
+    exclude_none: bool
+    exclude_computed_fields: bool  # v2.12
+    round_trip: bool
+    warnings: bool | Literal["none", "warn", "error"]
+    fallback: Callable[[Any], Any] | None  # v2.11
+    serialize_as_any: bool  # v2.7
+
+
 class SQLModel(BaseModel, metaclass=SQLModelMetaclass, registry=default_registry):
     # SQLAlchemy needs to set weakref(s), Pydantic will set the other slots values
     __slots__ = ("__weakref__",)
@@ -984,25 +1001,29 @@ def sqlmodel_update(
         obj: builtins.dict[str, Any] | BaseModel,
         *,
         update: builtins.dict[str, Any] | None = None,
+        **model_dump_kwargs: Unpack[_ModelDumpKwargs],
     ) -> _TSQLModel:
-        use_update = (update or {}).copy()
-        if isinstance(obj, dict):
-            for key, value in {**obj, **use_update}.items():
-                if key in get_model_fields(self):
-                    setattr(self, key, value)
-        elif isinstance(obj, BaseModel):
-            for key in get_model_fields(obj):
-                if key in use_update:
-                    value = use_update.pop(key)
-                else:
-                    value = getattr(obj, key)
-                setattr(self, key, value)
-            for remaining_key, value in use_update.items():
-                if remaining_key in get_model_fields(self):
-                    setattr(self, remaining_key, value)
-        else:
+        if not (isinstance(obj, dict) or isinstance(obj, BaseModel)):
             raise ValueError(
                 "Can't use sqlmodel_update() with something that "
                 f"is not a dict or SQLModel or Pydantic model: {obj}"
             )
+        if isinstance(obj, BaseModel):
+            # Create a temp UpdateModel schema (removes extra serialization settings)
+            ObjClass = obj.__class__
+            fields_def = {
+                fname: finfo.annotation
+                for fname, finfo in ObjClass.model_fields.items()
+            }
+            UpdateModel = create_model(f"_{ObjClass.__name__}Update_", **fields_def)
+            # rebuild obj instance with model_construct
+            obj = UpdateModel.model_construct(
+                _fields_set=obj.model_fields_set, **obj.__dict__
+            )
+            # Now `obj.model_dump` works with **model_dump_kwargs
+            obj = obj.model_dump(**model_dump_kwargs)
+        use_update = (update or {}).copy()
+        for key, value in {**obj, **use_update}.items():
+            if key in get_model_fields(self):
+                setattr(self, key, value)
         return self
diff --git a/tests/test_update.py b/tests/test_update.py
index de4bd6cdd2..0d6beffbb3 100644
--- a/tests/test_update.py
+++ b/tests/test_update.py
@@ -1,3 +1,4 @@
+from pytest import raises
 from sqlmodel import Field, SQLModel
 
 
@@ -5,10 +6,12 @@ def test_sqlmodel_update():
     class Organization(SQLModel, table=True):
         id: int = Field(default=None, primary_key=True)
         name: str
+        city: str
         headquarters: str
 
     class OrganizationUpdate(SQLModel):
-        name: str
+        name: str = Field(exclude=True)
+        city: str | None = None
 
     org = Organization(name="Example Org", city="New York", headquarters="NYC HQ")
     org_in = OrganizationUpdate(name="Updated org")
@@ -17,4 +20,13 @@ class OrganizationUpdate(SQLModel):
         update={
             "headquarters": "-",  # This field is in Organization, but not in OrganizationUpdate
         },
+        exclude_unset=True,
     )
+    # fields that should stay the same
+    assert org.city == "New York"
+    # fields that should be updated
+    assert org.name == "Updated org"
+    assert org.headquarters == "-"
+    # test raise value error when passing in updates other than dict or BaseModel
+    with raises(ValueError):
+        org.sqlmodel_update(["Boston"])