Public Act 497 of 2012 – Transfer of Ownership Update on Real Property Taxes in Michigan

law pic for articleOn 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 [Public Act (“P.A.”) 497].  This Act indicates that beginning December 31, 2013, a transfer of residential real property is not a transfer of ownership for purposes of changing the taxable value (thereby raising property taxes) if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.

There is considerable uncertainty in how the new law will be interpreted and applied.  However, the State Tax Commission did issue Bulletin 5 of 2013, dated May 13, 2013, that clarified the definition of residential real property, as well as the following definitions:

1) “Transferee” is defined as the person to whom the conveyance is made.

2) “Transferor” is defined as one who conveys a title, right or interest in property.

3) “Affinity to the first degree” includes the following relationships:  spouse, father or mother, father or mother of the spouse, son or daughter, including adopted children and son or daughter of the spouse.

Several questions have not been clarified and remain unanswered.  For example, if the property is inherited from Mom or Dad’s estate at their deaths, does the inheritance count as a transfer from Mom or Dad?  What 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?

The largest negative impact of this new legislation will be felt by local governments and school districts which use property tax dollars to help fund operations.  We can expect to see considerable opposition from these groups to any expansion of the application or interpretation of the new law.  For this reason, until further clarification and guidance is provided by the State Tax Commission, I advise that this new law be interpreted and applied it in its most literal sense.  Therefore, parents (as the Transferor) will want to pass their family vacation property directly to their children (the Transferees) while they are still alive in order to avoid an increase in property value for property tax purposes.*

While on the surface this seems to be wonderful news for vacation property owners who want to keep their property in the family for future generations, there are many additional issues that should be considered before families jump to transferring ownership of their property to their children.  In “Saving the Family Cottage, A Guide to Succession Planning” (Nolo Press, 4th ed., 2013), I describe common issues that arise with family owned vacation property, as well as recommended approaches to dealing with them.  I encourage you to obtain a copy of this very readable book, which can be ordered directly from the Cottage Law website.  Once mom and dad are no longer paying for and making all of the decisions on the family vacation property, very hard, sometime irreparable, feelings can develop among siblings when they are left without a plan in place for managing the property.  There are ways for mom and dad to take advantage of the new law, while ensuring that the property will not become a burden to future generations.  The family cottage, and the family itself, can be saved by providing a structure for managing, financing and decision making at the time of the transfer of ownership to descendants.

I urge you to act now in receiving assistance in whether transferring ownership of your property to your children during your lifetime is the best option.  There are several factors to be taken into account, including the parents’ future qualification for Medicare or Medicaid, etc.  We would be delighted to speak with you and talk through the options and possible solutions.  There is a fair amount of opposition to this new law and there is always the possibility that it will be repealed.  We recommend that after weighing all of the factors, if families wish to take advantage of P.A. 497, they should do so as soon as possible after December 31, 2013.  Therefore, we are urging families, do not wait until December of this year, or January of next year to begin researching and discussing the options.  Please feel free to visit our website or contact our office for assistance.

We will continue to monitor this new law closely, especially how it will be interpreted for families that have already transferred ownership of their property into a trust, LLC or family limited partnership.  We will pass on additional information as it becomes available.

*For a description of Michigan’s Proposal A and how property taxes are determined on Michigan property, see my January 4, 2013 blog post entitled “New Legislation on Michigan Property Taxes”.

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