New Legislation on Michigan Property Taxes

UPDATE on Real Property Taxes in Michigan.

On December 28, 2012, Michigan Governor Richard Snyder signed new legislation which will have a significant impact on the way Michigan residential property (including vacation property) is assessed for property taxes.  However, there is considerable uncertainty in how the new law will be interpreted and applied.  This memo will give you the most current information available on the impact of the new legislation.

Ever since January 1, 1995 when Proposal A went into effect, each parcel of real estate in Michigan has had a constitutional limitation on how much the value could appreciate each year for property tax purposes.  This limit is 5% or the rate of inflation, whichever is less.  At the same time, property values have appreciated in market value at a rate that is not limited except by market forces.  This has resulted in each parcel having two different values—one for property tax calculations, and one for market purposes.  The value for property tax purposes is sometimes called the “capped” value and is shown on your tax bill as the “Taxable Value.”   The value for market purposes is designated on the tax bill as the “State Equalized Value” (sometimes abbreviated as “SEV”).  “Taxable Value” is a totally artificial value and is used for no purpose other than calculating the amount of property tax assessed on your parcel.  Both values will be shown on the annual assessment that is sent out by your Township on or before March 1 of each year, and will also be shown on the two tax bills you receive each year.

The result of this split in values is that each parcel has two values.  In an appreciating market where property values are increasing at a rate greater than the rate of inflation, SEV grows at a rate much faster than Taxable Value.  Even with the recent economic woes in Michigan, in many cases involving vacation property, it is not unusual for SEV to be 3, 4 or 5 times larger than the Taxable Value.  So long as ownership of the property remains the same, SEV has little if any impact on the owner.

This split in values continues until there is a “transfer of ownership” of the property.  After a “transfer of ownership,” the new Taxable Value is equal to the State Equalized Value, and the result is typically an increase in property taxes of 2, 3 or more times the amount paid by the previous owner.  The definition of “transfer of ownership” is a very technical definition and includes a number of exceptions and qualifications.  The new legislation adds a new exception, and EXCLUDES the following from the definition of uncapping transfers.  It says:

“Beginning December 31, 2013 a transfer of residential real property (will not uncap the property value) if the transferee (new owner) is related to the transferor (previous owner) by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.”

For our purposes, persons related to you to the first degree by blood include your parents, and your children, including legally adopted children.  Persons related to you to the first degree by affinity include your spouse, mother-in-law, father-in-law, son-in-law, daughter-in-law, stepson, stepdaughter, stepmother or stepfather.  All other relatives are related by more than the first degree.

From this simple sentence come more questions than answers.  For example, if the property is owned in Mom or Dad’s trust, does a distribution from the trust to the next generation count as a transfer from Mom and Dad?  What if the property is in a limited liability company owned by Mom and Dad—are transfers of ownership of the LLC the same as transfers of real property?  How about property owned by a family corporation or limited partnership?  If the answer is “no” to property owned by one of these entities, may the property be removed and put back in Mom or Dad’s name individually without uncapping so that it may be transferred to the next generation without uncapping?

Please note that only transfers occurring on or after December 31, 2013 are included in the exception to uncapping transfers.  This means that we must wait almost an entire year before we can take advantage of the new law.  Hopefully, this delay in the application of the new law will allow various taxing authorities time to determine how to apply the new law, and provide more complete information to property owners on what may and may not be done to fall within the new exception.

Lastly, remember the uncapping of property taxes is only one of the reasons to carefully develop a plan for transferring ownership of vacation property that you want to keep in the family for succeeding generations of family members to enjoy.  Restricting ownership to lineal descendants and providing a structure for managing, financing and decision making remain unaffected by the new law, and are equally, or more, important in creating a plan for transferring ownership to descendants.

Until we know more about how the new law will be interpreted, applied and enforced, we suggest that if you have already transferred ownership of your property into a trust, LLC or family limited partnership, you leave it titled in its current form.

We will continue to monitor this closely and pass on additional information as it becomes available.  In the meantime, please contact our office if you would like to discuss your individual situation as it relates to property taxes.

Copyright David S. Fry 2013

Comments

  1. On or around August 4, 2013 a series of unforeseen events caused our site to simply disappear from the web. There were both human and technical errors, but the end result was that all files and backups were irretrievably erased. Our web team is painstakingly reconstructing the site. Unfortunately, all user comments and information posted on this article prior to August 4, 2013 have been lost.

    We still do not have much more information on how the new law will be interpreted, applied and enforced. We suggest that if you have already transferred ownership of your property into a trust, LLC or family limited partnership, you leave it titled in its current form.

    We will continue to monitor this closely and pass on additional information as it becomes available. In the meantime, please contact our office if you would like to discuss your individual situation as it relates to property taxes.

  2. I want to quit claim a small farm to my son as the split and survey is under way will the taxes be un capped. think you Marvin Decker

    • Under the new law that went into effect on January 1 of this year, a parent may transfer ownership of real estate to a son or daughter without uncapping the value for property tax purposes. If you own the property in your name or with your wife and there is no mortgage on the property, you are entitled to transfer ownership to your son without raising the property taxes. You will need to comply with any zoning ordinance requirements regarding the size of the parcel you want to give to him, and you also must comply with the legal requirements for land divisions. However, the property taxes should not go up.

  3. What if my wife and I purchase/mortgage a home from her father. Wound the taxes stay capped?

    • Assuming that the use of the property does not change after you buy the property, a transfer of ownership from your wife’s father to your wife is clearly exempt from uncapping. Whether you may be included is not entirely clear. The law, as written, states that transfers TO the following relatives are exempt from uncapping:
      1. Spouse
      2. Father or Mother
      3. Father or Mother of the Spouse
      4. Son or daughter
      5. Adopted son or daughter
      6. Son or daughter of the spouse
      7. Siblings

      You will notice that sons-in-law and daughters-in law are not included in this list, but fathers and mothers in law ARE included in this list. If this language is taken literally, it means that you could transfer property to your wife’s parents without uncapping, but they cannot transfer property to you without uncapping. Many lawyers are saying that that interpretation doesn’t make sense, and they believe that a transfer from father-in-law to you is exempt. That interpretation makes sense, but that is not what the law specifically states.

      To be safe, the most conservative approach is for your wife to buy the property from her father and record the deed conveying title just to her. After that deed is recorded, she can record a second deed from herself to herself and you, thereby getting title to the two of you without uncapping. If you want to be more adventuresome, you can have your wife’s father sell to the two of you directly, but there is no guaranty that will avoid uncapping. If you intend to pursue this approach, I strongly recommend that you talk with the local tax assessor in your Township BEFORE a deed is recorded to confirm that the assessor will not uncap the property value and raise the taxes.

      It isn’t clear from your question whether you intend to assume your father-in-law’s existing loan and mortgage, or whether you intend to get a new loan and mortgage to buy the property from your father. If you mean that you want to assume his loan and mortgage, you must work with your father-in-law’s lender who will have to approve both the sale of the property and your assumption of the loan and mortgage.

  4. Does Michigan Law allow a Son to transfer Title to his Father when the father has paid the last year of taxes and therefore has a vested interest in the property. There is no mortgage for the property.

    • There are several levels of questions in your comment. First, paying taxes on property alone does not give anyone a “vested interest” in the property. If the son and father had a written agreement amounting to a mortgage on the property when the father paid the taxes, and the document was properly executed and recorded with the register of deeds in the county where the property is located, then the father has a secured interest in the property. Otherwise, merely paying taxes does not give the father any ownership or other property interest in the property.

      Next, clearly the son can transfer title to the property to his father, assuming he is the unmarried, sole owner of the property in the first place. Title to real estate is transferred by signing a deed in full compliance with the law, which has a number of requirements for execution of deeds. If the son is married, his wife will have to join in the deed because wives have a “dower interest” in all property owned by their husband during the marriage. After execution, the deed must be recorded with the register of deeds in the county where the property is located, and the new owner must file a Property Transfer Affidavit with the tax assessor in the township or city where the property is located.

      If the question is whether the son can transfer property to the father without uncapping the value for property tax purposes and thereby raising the property taxes, the first questions is whether the property is classified as residential. The recent change in property tax laws allowing transfers without uncapping applies only to residential property. Next, the use of the property cannot change after the transfer or the exemption from uncapping will not apply.
      Finally, there remains the question of whether transfers from a son to a parent are exempt from uncapping, even assuming all other conditions are satisfied. The statute itself exempts transfers “if the transferee is related to the transferor by blood or affinity to the first degree….” The Michigan State Tax Commission defines persons of the first degree to be son, daughter, father or mother. Thus, assuming all other conditions are met, a son may transfer title to real property to his father without uncapping the property value and raisng the property taxes.

      The issue of having or not having a mortgage on the property has no bearing on the impact of a transfer of the real property on property taxes.

  5. Michele Lewis says:

    I have a question. My parents have vacation property in Michigan and intend to pass it along in their estate. There are for children, but only one currently wants to own the vacation property. My parents’ estate is currently large enough to divide equally to all four adult children, with the vacation property value comprising substantially all of the one child’s 1/4 interest. However that may not be the case when the estate is probated – the other estate assets may depreciate and the vacation home may appreciate such that the child receiving the vacation property may inherit substantially more than the other three. My parents want to take advantage of the new uncapping laws now and transfer some ownership to the interested child, possibly through an llc. However, they still intend for the full value of the vacation property to be included in their estate, and in the even that its value exceeds 1/4 of their estate’s value expect the interested child to ‘pay off’ the three siblings the difference. Can the property be transferred with a clause that covers this? Would it be legally binding. Can another clause be added to revert the vacation property ownership back to the estate, if the receiving child is unable to payoff the siblings? Thanks for whatever information you can give me.

    • Michele,
      First, thank you for your inquiry through our Cottage Law website. As the law on Michigan property taxes now reads, your parents must give ownership of the property to one of their children while at least one of your parents is still living in order to avoid the “uncapping” of property value and increase in property taxes when they are both deceased. One approach they could take is to delay transferring ownership as long as reasonably possible to see what appreciation occurs on the property, but make sure that at least one of them transfers title to it before they both pass away. Obviously, there is some risk in this approach in that the transfer might not be completed before they both pass.

      Another reason they may want to wait on transferring is because there is an amendment to the uncapping law now before the Michigan Senate (having already been passed by the House) that would exempt transfers of property at death from the uncapping scheme. If passed, this change would allow your parents to leave the property to the one child in their will or trust, and have it transferred at that time. In this case, they would need to include appropriate language in their estate planning documents to permit a valuation of the property at that time, and an adjustment in the distribution of assets to accommodate a transfer of the property to just one of their children.

      I am optimistic that the proposed legislation will be passed and signed into law sometime this calendar year. However, there is no guarantee this will happen, and depending on the health of your parents, they may not want to take any risk on uncapping. If so, then they should consider transferring title in the near future.

      I don’t think I can give you any further advice on this without know more about your parents situation. I would be happy to work with them on this, but it is not really something that can be done via the website or by email.

      Please let me know if they wish to pursue this.

      Regards,
      Dave Fry

  6. Paula A. Stewart says:

    Our cottage is currently set up in Q pert trust to be held for our two children until my death. How will the new law impact the uncapping of the property tax or will it?

    • The new legislation will not impact property owned by a trust, including Qualified Personal Residence Trusts, also known as QPRT’s. Just as with all property owned by a trust, property in a QPRT will have the value “uncapped” when there is a change of beneficiaries of the trust. In QPRT’s, there is a change of beneficiaries when the QPRT term ends. At that point, the trust typically directs that ownership of the property is to be distributed to the beneficiaries–typically the children of the parents who owned the property and established the QPRT. Thus, the result is that the property value will uncap and the property taxes increase significantly even though the parents are still alive. While the QPRT is an effective way to remove the value of the property from the parents’ estates for estate tax purposes, it can result in an increase in property taxes much sooner than would be the case if the property were left to the children after the parents pass away.

  7. Damon Spencer says:

    Thank you for this information regarding selling of a home to a family member and keeping the property tax the same. In my situation my father recently passed and my mother is selling the house to me. I want to take advantage of this law that allows is to keep the property tax rate the same. How do i go about it? and What do I need to do next?

    Thanks,

    Damon

    • You can purchase the property in any way that you and your mother work out. Uncapping occurs either upon actual transfer of legal title to the property, or upon signing a land contract to purchase the property. In either case, the law requires the filing of a “Property Transfer Affidavit” with the tax assessor where the property is located, and you should indicate on that form that the transfer is exempt from uncapping because it is being transferred from parent to child. I suggest that you contact an experienced real estate attorney to help you work out the details of the purchase and prepare the documents to complete the transaction.

  8. Is there still a possibility trusts will be added to the capping legislation?
    Thank you,
    Anne

    • PA 310 already covers distributions from a trust, and exempts a change of trust beneficiaries and distributions from a trust so long as the change or transfer is to an qualified individual. Qualified individuals include: the property owner or settlor of the trust that owns the property, the spouse of the owner or settlor, and the owner’s or spouse’s: mother, father, brother, sister, son, daughter, adopted son or daughter, grandson and granddaughter.

    • In addition to Mr. Fry’s reply, see his blog post of October 16, 2014 “PUBLIC ACT 310 NOW EFFECTIVE!”

  9. Horace Hunt says:

    Dear Mr. Fry,
    My parents have owned a property on Elk Lake in Antrim County, MI since 1981. My parents had trusts that mirrored one another with the beneficiaries being my two sisters and me. I am the trustee of each of the trusts. My father died in 1990 and my mother in 2014. Technically, this property is not a vacation property since it was the principal residence of my mother and is now my principal residence. I am in the process of settling both trusts and have executed 3 trustee’s deeds to each of my sisters and me, making each of us 1/3 owners. I believe the property taxes remain capped, but, finally, comes my question. One sister wants completely out and we are considering selling lake front property sufficient to buy her out. Will transferring a portion of the property uncap the taxes on that property sold, or could it uncap the taxes on the entire parcel?

    • I don’t have enough information to respond to the uncapping issue, but I can say that the only uncapping that occurs is on property whose ownership is transferred. So, if you split the property and sell some and retain some, the only property value that will uncap is on the portion you sold. Please check with the Township in which the property is located since many Townships have requirements for splitting existing parcels.

  10. We are Michigan residents. We want to leave our property to our two children who are not residents, would continue to be nonresidents, and would use it as vacation property. We understand the taxable value would not change but would the actual tax increase because the property would then be owned by nonresidents? The tax for nonresident second homeowners in our area is about double the resident tax. Would it matter if it was in a trust or not? Thank you.

    • Michigan property taxes do not differentiate between residents and non-residents of Michigan. All property owners pay taxes at the same rate. What you may be referring to is the Principal Residence Exemption, under which property owners who occupy the property as their principal residence are eligible to claim an exemption. The exemption is an 18 mill reduction in property taxes, but again, it is only available to owners who occupy the property as his/her principal residence. For example, a Michigan resident pays the same property taxes on any second property (such as a vacation home) as every other property owner where the owner claims the Principal Residence Exemption on his/her main residence. By law, only one Principal Residence Exemption may be claimed, regardless of where the owner resides. So if an owner of Michigan vacation property resides in Michigan or any other state, that owner may not also claim the Exemption on the vacation property if he/she is claiming it (or the equivalent exemption in another state) on his/her home.

      Based on what you’ve stated in your question, your children will not faced an uncapping when they acquire ownership of the property, but if you are presently claiming the Principal Residence Exemption on the vacation property, they may lose the Principal Residence Exemption if none of them live in the vacation property as his/her principal residence. This loss will be the 18 mill reduction in taxes, and in many cases, that reduction can amount to as much as 40% of the total property tax bill.

  11. Janice White says:

    I own one third of a family cottage in Michigan. I would like to transfer my one third share to my 2 adult children at this time. What is the best way to do this? Would a Lady Bird Deed be a good way to do this? Thank you.

    • If you want to transfer your ownership in the property to your children immediately, the best way is to sign a deed conveying your interest to them. Because of a recent amendment to the property tax laws, you may make this transfer to your children without “uncapping” the property value which would raise the taxes. If you use a Lady Bird deed, you will be reserving a life estate in the property, and that will “uncap” the value on your death, at least under the current interpretation of the uncapping laws.

  12. Patricia Nickerson says:

    I am a California resident and am planning to convert property I’ve inherited from my parents’ trust to an LLC, eventually co-managed by nieces and nephews living in Michigan. Since CA is a community property state, my husband and I will co-manage, with one niece and nephew, during our lifetimes. What is likely to happen regarding the capping of this property? It will never be the principal residence of anyone, but will be used by family members.
    Thank you for your consideration.

    • I’m assuming your property is in Michigan, and that you are the only owner of it. The uncapping laws are triggered by transfers of ownership, regardless of the residency of the owner or who manages the property. So long as you and your husband remain the owners the property, the property value will not uncap. Should you transfer any ownership interest to your niece or nephew, there will be an uncapping equal to the amount of ownership you transfer. While there is a principal residency exemption which works to lower taxes for property owners who live on the property as their principal residence, that is an independent issue and is not related to uncapping.

  13. Kelly Ray says:

    I inherited some property a few years ago and the taxable value was uncapped. The tax more than tripled. Is only property transferred after dec 31 2013 exempt from being uncapped or is there any action we can take to get the taxable value back to the original capped rate? Thanks.

    • Unfortunately, it is only direct transfers that occur after December 31, 2013 that are exempt. Transfers through inheritance must occur after December 31, 2014 in order to be exempt. I know of no way to restore previous taxable values or to obtain an exemption for transfers that occur before these dates .

  14. Thanks for running an informative website.

    My parents have rental property held in an LLC (no mortgage). If there is a change in ownership of the LLC, would this be considered a transfer of real property and result in uncapping of the property taxes for the new owner of the LLC? Thanks.

    • At the present time, the law provides that the property value with uncap (and property taxes are likely to increase) when more than 50% of the ownership of the LLC is transferred to a different owner. This applies both to direct ownership (by individuals) of the property AND to a transfer of beneficial interests of trusts that own property. It does not matter if the property is strictly residential or is used for commercial purposes such as a rental property.

  15. Currently, my husband and I own property that is owned by us individually, owned by us jointly, and owned by our Trust. We want to put these properties into two LLCs that we have currently set up but we haven’t transferred our property into. My question is: (A) will transferring property to an LLC trigger an uncapping; (B) does it matter whether the property transferred is owned by my husband and yet transferred into my LLC? and, lastly, (C) upon our death, will this cause our children to have an uncapping when they inherit the LLCs (and the property). Thank you so much.

    • Pam,
      You have listed three different forms of ownership, each of which is mutually exclusive with the other two. Property is either owned individually (one person owns it) or jointly (more than one person owns it) or it is owned by your trust, but the same parcel of property cannot be owned by more than one of these ways at the same time. Let me answer your question this way: Under current law, property may be transferred into an LLC without uncapping ONLY if the owner(s) of the LLC when the property is transferred are identical to the owner(s) of the property at the time of the transfer–identical in both name and percentage owned. Obviously, this means that it is critical to determine the current owner of the property before the transfer is made in order to avoid uncapping on the transfer into the LLC.

      Again under current law, property owned by an LLC is uncapped (and the taxes go up) when MORE THAN 50% of the ownership of the LLC is transferred. This “more than 50%” test is cumulative over time, beginning when the property is first transferred into the LLC. It may take years to reach the “more than 50%” threshold, but once it is reached, the property value is uncapped. If the original owner hangs on to the ownership until he/she dies, then the property will uncap at death, since ownership must be transferred at that time.

  16. Sue Allington says:

    Hello, My husband and I bought a property as a rental home in Farmington Hills, MI (both on mortgage) and then we put it into an LLC with me being the only owner of LLC. Now we want to transfer back to us as owners from LLC by quit claim (no longer renting it out) to claim the homestead tax exemption. Will it come uncapped doing thisand my taxable value go up?

    • Sue,
      First, thank you for your inquiry through our Cottage Law website regarding removing property from an LLC. Under the current guidelines from the State of Michigan, property in an LLC may be removed without uncapping so long as it goes back to the former owner or owners who put it into the LLC originally. Thus, so long as it goes back to the same person or persons who put it into the LLC, no uncapping should occur. At that point, if you are the owner of the property and live in it as your full time residence, you should be eligible to claim the Principal Residence Exemption (formerly called the homestead exemption) on your property taxes. Please note, however, that this exemption is not permitted on rental property—you must live in the residence as your permanent residence to be eligible. Also, you might want to check with your lender to make sure that the lender has no objection to this transfer, as most mortgages have a “due on sale” clause that accelerates the entire remaining balance on the mortgage debt if you change title to the property.

      I hope this helps, and wish you success in dealing with this property.

  17. Hello, My dad owns a cottage (with his new wife) that he is considering gifting (100%) to myself and another sibling. It is not in a trust or an LLC. If the property transfers ownership, will the property taxes be uncapped at any point in time? Thank you.

    • Ann,
      First, thank you for your inquiry. As the law stands today, a parent may transfer ownership of property to his child or children without uncapping the property taxes, so long as the property is not used for “any commercial purpose” after the transfer. Renting the property to persons outside the family for more than 14 days in any one calendar year constitutes using the property for “a commercial purpose”. So long as you don’t rent the property to outsiders for more than 14 days in any one calendar year, there should be no uncapping as a result of your father’s transfer of ownership to you or to you and your sibling. This form of ownership between you and your sibling is not at all the best way for multiple owners to manage the property after you get it from your father, but if his transfer to you and your sibling is done properly, no uncapping should occur.

  18. My father owned a cottage in northern Michigan. It was titled in his trust. He died in February, 2013. The beneficiaries of his trust are his three children as his wife passed in 2002. The property has already been uncapped as he died in early 2013 before the tax law change. One of the three siblings sold his interest in the cottage to one of the other siblings leaving the cottage now owned 2/3 owned by one sibling and 1/3 owned by the other sibling. The titling of the cottage needs to be removed from the father’s trust and changed to the proper owners. What is the best way to go forward with the titling? Would a Cottage trust be the most logical way to hold the cottage or is there some other solution?

    • As part of the administration of your father’s trust, title to the property should have been distributed out of the trust to the 3 children. That is the only way that the sibling who sold could pass clear title to his/her 1/3 ownership interest in the property. If this was done, then title is now in the name of the 2 siblings who remain as owners. If those steps were not taken, they definitely should be taken now. The successor trustee of Dad’s trust should sign a trustee’s deed conveying title to the property out of Dad’s trust to the 3 children, and from there, the selling sibling should sign a deed conveying his/her 1/3 interest to the sibling who bought it.

      In answer to your question regarding the best way to hold the cottage going forward, because the property value has already uncapped, I would recommend setting up and LLC to own and manage the property, with ownership of the LLC being identical to the 2/3’s – 1/3 ownership of the property. This will mean that the two owners will need to agree on the processes, procedures and formulae for sharing ownership of the property. It is much better (and easier) to get these in place now before an issue arises on which the siblings cannot agree.

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