diff --git a/src/mixin.ts b/src/mixin.ts
index 1a1a1805..9f21b093 100644
--- a/src/mixin.ts
+++ b/src/mixin.ts
@@ -5,7 +5,7 @@ import {
   SetupFunction,
   Data,
 } from './component'
-import { isRef, isReactive, markRaw, markReactive } from './reactivity'
+import { isRef, isReactive, markRaw, markReactive, toRefs } from './reactivity'
 import { isPlainObject, assert, proxy, warn, isFunction } from './utils'
 import { ref } from './apis'
 import vmStateManager from './utils/vmStateManager'
@@ -94,13 +94,16 @@ export function mixin(Vue: VueConstructor) {
         return activateCurrentInstance(vm, () => bindingFunc())
       }
       return
-    }
-    if (isPlainObject(binding)) {
+    } else if (isPlainObject(binding)) {
+      if (isReactive(binding)) {
+        binding = toRefs(binding) as Data
+      }
+
       const bindingObj = binding
       vmStateManager.set(vm, 'rawBindings', binding)
 
       Object.keys(binding).forEach((name) => {
-        let bindingValue = bindingObj[name]
+        let bindingValue: any = bindingObj[name]
         // only make primitive value reactive
         if (!isRef(bindingValue)) {
           if (isReactive(bindingValue)) {
diff --git a/test/helpers/utils.ts b/test/helpers/utils.ts
index 8d8f5d54..ba4060d6 100644
--- a/test/helpers/utils.ts
+++ b/test/helpers/utils.ts
@@ -3,3 +3,7 @@ const Vue = require('vue/dist/vue.common.js')
 export function nextTick(): Promise<any> {
   return Vue.nextTick()
 }
+
+export function sleep(ms = 100) {
+  return new Promise((resolve) => setTimeout(resolve, ms))
+}
diff --git a/test/setup.spec.js b/test/setup.spec.js
index 075c231b..09a8bb75 100644
--- a/test/setup.spec.js
+++ b/test/setup.spec.js
@@ -9,7 +9,9 @@ const {
   toRefs,
   markRaw,
   toRaw,
+  nextTick,
 } = require('../src')
+const { sleep } = require('./helpers/utils')
 
 describe('setup', () => {
   beforeEach(() => {
@@ -861,4 +863,27 @@ describe('setup', () => {
     const vm = new Vue(Constructor).$mount()
     expect(vm.$el.textContent).toBe('Composition-api')
   })
+
+  // #487
+  it('should handle updates for directly return a reactive object.', async () => {
+    const opts = {
+      template: '<div>{{ count }}</div>',
+      setup() {
+        const state = reactive({ count: 1 })
+
+        setTimeout(() => {
+          state.count = 2
+        }, 1)
+
+        return state
+      },
+    }
+    const Constructor = Vue.extend(opts).extend({})
+
+    const vm = new Vue(Constructor).$mount()
+    expect(vm.$el.textContent).toBe('1')
+    await sleep(10)
+    await nextTick()
+    expect(vm.$el.textContent).toBe('2')
+  })
 })