Transferring Real Estate to a Business in Michigan: Understanding Property Tax Uncapping
Transferring real estate to a business entity is a common strategy used for various purposes, including asset protection and estate planning. However, it's crucial to understand the potential implications of such a transfer on your property taxes in Michigan. One significant consideration is the possibility of "uncapping" your property taxes, which could lead to a substantial increase in your tax liability. In this article, the estate planning and business attorneys Thompson Legal will explore the concept of property tax uncapping, its connection to transferring real estate to a business entity, and factors to consider when making such a decision.
Please note that this post is not exhaustive, and every situation is unique. In the event that you have legal questions it is advisable to speak with a licensed attorney. Contact Thompson Legal to speak with a Michigan Business attorney today.
What is Property Tax Uncapping?
In Michigan, property taxes are subject to a cap that limits the annual increase in the taxable value of your property. This cap, often referred to as the Consumer Price Index (CPI) cap, generally restricts the increase to the rate of inflation or 5%, whichever is lower. However, certain events can trigger an "uncapping" of your property taxes, allowing the taxable value to be reassessed at its full market value. This reassessment can result in a significant jump in your property taxes.
Property tax uncapping in Michigan affects businesses entities just as it does homeowners. Essentially, it means that when a commercial property changes ownership, the taxable value can be reassessed to its full market value, potentially leading to a significant tax hike for the new owner and business.
How Transferring Property Can Trigger Uncapping
Transferring real estate to a business entity, such as a Limited Liability Company (LLC), can be considered a "transfer of ownership" under Michigan law. According to the Michigan Department of Treasury, a transfer of ownership occurs when there is a change in the beneficial use of the property or a change in the control of the property. If the transfer is deemed a transfer of ownership, it can trigger an uncapping of your property taxes. This means that the taxable value of your property will be reassessed at its current market value, potentially leading to a significant increase in your property tax bill.
Change In Beneficial Use
Central to the concept of transfer of ownership is a change in the beneficial use of the property. Michigan statute defines “transfer of ownership” generally as the conveyance of title to or a present interest in property, including the beneficial use of the property, the value of which is substantially equal to the value of the fee interest. MCL 211.27a(6)(a)-(j) provides a variety of examples of what constitutes a transfer of ownership for taxable value uncapping purposes. If a transfer of property (or ownership interest) meets one of these definitions and does not fall under one of the exceptions or exemptions noted in the law, that transfer is a transfer of ownership.
Change in Control
The State of Michigan recognizes that a transfer of property (or ownership interest) among entities if they are commonly controlled as exempt from uncapping. The term “common” is defined as “belonging equally to, or shared alike by, two or more or all in question.” Entities which are not engaged in a business activity cannot be entities. An "entity" can be a corporation, partnership, limited liability company, limited liability partnership, or any other legally recognized entity.
Michigan Revenue Administrative Bulletin 1989-48 provides guidelines for determining whether entities are under common control for the purpose of uncapping property taxes on business transfers. The bulletin adopts the U.S. Department of Treasury Regulation 1.414(c), which relates to pension, profit-sharing, and stock bonus plans, to identify entities under common control. This includes various types of entities, such as individuals, corporations, partnerships, trusts, and estates.
MRAB-1989-48 outlines three types of controlled groups: parent-subsidiary, brother-sister, and combined groups. A parent-subsidiary group exists when one or more chains of organizations which are connected through ownership by a controlling interest of a common parent organization. A brother-sister group exists when the same five or fewer individuals, estates, or trusts own a controlling interest in each entity and have effective control. A combined group is a combination of a parent-subsidiary group and a brother-sister group, where at least one entity is the common parent in both groups.
Control Determination and Ownership Rules
The determination of what a controlling interest is varies depending on the type of entity and the parties involved. MRAB-1989-48 provides that common control only exists when ownership is identical, or when the same five or fewer people have an 80% interest in the properties. The Michigan Court of Appeals, however, has declined to enforce the 80% bright line test in TRJ & E Properties, LLC v. City of Lansing, and instead held that 60-75% was sufficient ownership to satisfy “common control”. Another important exception to note arose in Sebastian J. Mancuso Family Trust v City of Charlevoix when the Michigan Court of Appeals determined that Trustees between trusts do not equate to being commonly controlled.
Exceptions to Common Control Definition
While the bulletin provides a detailed framework for identifying entities under common control, it is not exhaustive. There are two specific circumstances which allow for entities to be considered under common control, even if they don't meet the criteria outlined in MRAB-1989-48. These exceptions are:
Initial transfers by individuals, made to an entity are considered to be transfers between commonly controlled entities and not transfers of ownership, if the ownership interests and extent of control which the individuals have in the entity are identical to the ownership interest and extent of control which each of the individuals had in the property prior to the initial transfer, and
Transfers where the interest in a property is conveyed (retransferred) from an initial transferee entity, as described in 1 above, to the individuals who made the initial transfer to that entity, if the ownership interests and extent of control which those individuals have in the entity at the time of the retransfer are identical.
Considerations for Business Owners
Before transferring real estate to a business entity in Michigan, owners should carefully consider the potential for property tax uncapping. To avoid uncapping, ensure the transfer does not constitute a change in beneficial use of the property. Additionally, understand the rules regarding "common control," where transferring property between entities with identical or majority ownership by the same individuals may prevent uncapping. Consulting with a legal professional specializing in Michigan property tax law is crucial to assess your specific situation and minimize potential tax liabilities.
Conclusion
Michigan's property tax uncapping exemptions can offer valuable opportunities for businesses to manage their tax burden. By understanding these exemptions and staying informed about recent legal developments, businesses can make educated decisions regarding property ownership and transactions. To ensure your business takes advantage of all available exemptions and navigates property transactions with tax efficiency, contact Thompson Legal today to schedule a consultation with an experienced business attorney specializing in Michigan property tax law. To schedule a consultation and discuss your specific needs, please visit our Contact page.
This article is for informational purposes only. It is not intended as legal advice. In the event you would like to speak with a Business Attorney, please Contact Thompson Legal at (734) 743-1646 to schedule a consultation.
