Uncapping Property Taxes in Michigan: Considerations for Real Estate Owners
The experienced real estate attorneys at Thompson Legal understand the complexities that Michigan property owners face when it comes to the uncapping of property taxes. Property taxes are often uncapped after a sale, but that is not always the case. Some transfers of ownership can accidently cause property taxes to be uncapped, triggering a costly ongoing problem for owners. In this article, the expert real property lawyers at Thompson Legal will detail the intricacies of property tax uncapping and discuss what real estate owners need to know in order to make informed decisions.
Note that this post is not exhaustive, and every situation is unique. The transfer of real estate may have unintended tax consequences, so it is always advisable to speak with an attorney or tax professional before any transfer. Contact Thompson Legal to schedule a discovery call with a Michigan real property attorney.
1. What is Property Tax Uncapping?
Property tax uncapping occurs as a result of a change in ownership of a property. In Michigan, the Taxable Value can only increase by the lesser of inflation or 5%. When there is a transfer of ownership, the taxable value “uncaps” to equal the State Equalized Value. The State Equalized Value is assessed at 50% of market value and rises at a rate must faster than the Taxable Value. Therefore, every transfer and “uncapping” of a property could lead to a significant increase in property taxes. Property owners need to be aware of the implications of uncapping to make informed decisions about their real estate assets.
2. What Triggers Property Tax Uncapping in Michigan?
Property taxes are uncapped by a non-exempt transfer of ownership. Michigan defines a “transfer of ownership” 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. Transfers of ownership include deeds, land contracts, deeds in trust, transfers due to intestate succession. After the transfer of ownership is executed, the taxes for that property will be uncapped.
3. What Transfers Are Exempt from Uncapping?
Michigan law, specifically MCL 211.27a(7), also provides property owners with a list of transfers which are exempt from property tax uncapping. Property owners should review the potential property transfer list in order to coordinate their transfers to limit property tax recalibration. These possible exemptions include:
Spousal Transfers: The transfer of property from one spouse to the other or from a decedent to a surviving spouse are exempt from uncapping.
Tenancy by the Entireties: A transfer from a husband, wife, or a married couple creating or disjoining a tenancy by the entireties is not a qualifying transfer of ownership.
Life Estate Termination: A transfer following the expiration of a life estate, provided the transferee is a close family member, and the property is not used for commercial purposes.
Foreclosure or Forfeiture: Transfers through foreclosure, forfeiture, or deeds in lieu of foreclosure or forfeiture until the property is subsequently transferred by the mortgagee or land contract vendor.
Tax Redemption: Property transfers by redemption by the person to whom taxes are assessed, involving properties previously sold for delinquent taxes.
Conveyance to Trust: A transfer to a trust when the settlor or settlor's spouse conveys the property. For residential real property, if the sole present beneficiary is a close family member and the property is not used for commercial purposes.
Court-Ordered Transfers: Transfers pursuant to a judgment or court order, excluding those with specific monetary considerations for the transfer.
Joint Tenancy Changes: Creation or termination of a joint tenancy involving at least one original owner, where the property remains a joint tenancy.
Security Interest: Transfers for security or the assignment or discharge of a security interest (e.g., paying off a mortgage).
Affiliated Group Transfers: Transfers of real property or ownership interests among members of an affiliated group, defined by stock ownership to a common parent corporation.
Public Trading: Normal public trading of shares representing over 50% of total ownership interest in a corporation, traded in multiple transactions involving unrelated parties.
Inter-entity Transfers: Transfers among corporations, partnerships, LLCs, or legal entities if commonly controlled.
Tax-Free Reorganization: Direct or indirect transfers resulting from transactions qualifying as a tax-free reorganization under the Internal Revenue Code.
Qualified Agricultural Property: Transfers of qualified agricultural property if the transferee files an affidavit affirming its continued qualification.
Qualified Forest Property: Transfers of qualified forest property, with the transferee filing a qualified forest taxable value affidavit.
Family Transfers: Transfers of residential real property among close family members, ensuring the property's use remains unchanged.
Trust Conveyance to Family: Conveyance from a trust, where the transferee is a close family member, and the residential real property is not used for commercial purposes.
After a qualifying transfer, property owners should execute a Property Transfer Affidavit detailing the appropriate exemption and submit it to the local access. The new owner of the property may be required to provide proof of the exemption to the local accessor, or Michigan Treasury, upon their request. Failure to comply can subject the property owner to a fine of $200.00.
4. The Mechanics of Property Tax Uncapping in Michigan
Property taxes are calculated using a formula that involves three key components: assessed value, taxable value, and the millage rate. The understanding the different application of these values is crucial, especially considering the financial implications of property tax uncapping.
Assessed Value (AV): determined based on the property's market value. However, Michigan law limits the annual increase in Assessed Value to either 5% or the rate of inflation, whichever is less.
Taxable Value (TV): the lesser of the Assessed Value or the Capped Value. The Capped Value is the Taxable Value from the previous year adjusted for any additions or losses and multiplied by the inflation rate.
State Equalized Value (SEV): determined by the local assessor and is meant to represent approximately 50% of the property's market value.
Millage Rate: rate set to fund public schools and services, which are assessed per $1,000 of a property's taxable value.
It's crucial for property owners to be aware of these values, especially during real estate transactions, as the uncapping of property taxes can significantly impact the overall cost of property ownership. Engaging with real estate professionals and tax advisors is advisable to navigate these complexities and make informed decisions.
5. The Costly Mistake of Uncapping:
Let's consider a hypothetical example to illustrate how Michigan property taxes are calculated and how a transfer resulting in uncapping affects them. Consider the following example:
Scenario 1: Before Ownership Transfer (Uncapped):
A property has a Market Value of $200,000. The Assessed Value (AV) is equal to 50% of the Market Value, so AV = $100,000.
The current owner has owned the property for several years, and the Taxable Value is currently $80,000 due to limitations on increases (e.g., capped to the rate of inflation).
Calculation:
SEV (State Equalized Value): $200,000 (50% of Market Value).
Taxable Value (TV): $160,000 (subject to limitations).
Property Tax Calculation: Assuming a millage rate of 50 mills (5%):
Property Tax = TV * (Millage Rate / 1,000) Property Tax = $160,000 * (50 / 1,000) = $8,000
Scenario 2: After Ownership Transfer (Uncapping):
The property is sold, resulting in a transfer of ownership. Uncapping occurs, and the Taxable Value is adjusted to the Assessed Value in the year following the transfer.
Calculation:
SEV (State Equalized Value): $200,000 (50% of Market Value).
Taxable Value (Uncapped): $160,000 (Adjusted to SEV due to uncapping).
Property Tax Calculation: Using the same millage rate of 50 mills (5%):
Property Tax = TV * (Millage Rate / 1,000) Property Tax = $160,000 * (50 / 1,000) = $10,000
6. What Property Owners Need to Know About Property Tax Uncapping
Given the potential financial consequences of property tax uncapping, property owners are advised to incorporate strategic estate planning measures. To avoid uncapping for future taxpayers, owners should consider transferring their interest into a commonly controlled entity, joint ownership, or transferring their interest into a trust. This may involve consulting with experienced financial professionals who can provide insights into minimizing tax implications while ensuring a smooth transfer of ownership.
Property owners should stay informed about relevant legislation and regulations updates that may impact property tax uncapping. Changes in state laws or local regulations could influence the uncapping process, and property owners need to adapt their estate planning strategies accordingly.
7. Resources for Michigan Property Owners
The State of Michigan Department of Treasury provides many valuable resources with further information on property taxes, including guidelines on changes in ownership and the uncapping process. Property owners can engage with these departments to understand specific guidelines and procedures relevant to their properties.
Michigan’s Transfer of Ownership Guidelines
State of Michigan Property Tax Calculator
Property owners are also urged to keep in touch with the assessing department local to their property. Local assessing departments offer insights into the transfers and uncapping process at the local level. Property owners should refer to material provided by local tax accessors to stay informed about the any township, city, or village specific regulations.
Conclusion:
Property tax uncapping in Michigan is a nuanced process that demands careful consideration from property owners, and the real estate attorneys at Thompson Legal are equipped to assist. By understanding the mechanics of uncapping, staying informed about relevant regulations, and seeking expert guidance, property owners can navigate this complex landscape with confidence. If you have questions about property tax uncapping or need assistance with strategic real estate transfer planning to avoid uncapping, contact us today. Thompson Legal is here to empower property owners and guide them through the Michigan's intricate property tax regulations.
This blog is for informational purposes only. It is not intended as legal advice. In the event you would like to speak with a real estate attorney about your case Contact Us at (734) 743-1646 to schedule a consultation.
