When Does A Real Estate Transfer “Uncap” Property Taxes In Michigan?

 

In 1994, Michigan voters approved Proposal A which limited or “capped” the annual increase in the taxable value of a parcel of real estate.  Specifically, Const. 1963, Art. IX, § 3 provides, in part:

“For taxes levied in 1995 and each year thereafter, the legislature shall provide that the taxable value of each parcel of property adjusted for additions and losses, shall not increase each year by more than [the inflation rate]… or 5 percent, whichever is less until ownership of the parcel of property is transferred. When ownership of the parcel of property is transferred as defined by law, the parcel shall be assessed at the applicable proportion of current true cash value.”

When you receive a Notice of Assessment from your local tax collection unit, it shows a number of values regarding your real estate:

• ASSESSED VALUE: Determined by the property’s market value, the tax assessor is constitutionally required to set the assessed value at 50% of the selling price or true cash value of the property.

• STATE EQUALIZED VALUE: This is assessed value adjusted following county and state equalization to ensure that the parcel is at the constitutional 50% level of assessment.

• TAXABLE VALUE: This is the value used for determining the property owner’s actual tax liability by multiplying this number by the local millage rate. Taxable value increases year to year are “capped” by the rate of inflation or 5%, whichever is lower.

The “cap” on increases of property tax property taxes protects the owner from drastic changes from year to year in liability due to volatile market conditions, runaway inflation, or other financial crises.  While the state equalized value will continue to increase at a higher rate on your Notice of Assessment, the taxable value will increase at a much lower rate to limit the owner’s tax exposure.  However, once the property is transferred, the property taxes are “uncapped” and the new owner must pay property taxes in the following year at the rate set by the state equalized value.  For example, an owner in 2021 sells his home to a buyer where his taxable value is $80,000.00 and the state equalized value is $100,000.00.  The owner pays property taxes in 2021 based on $80,000.00 multiplied by the local millage rate.  The sale “uncaps” the taxable value and the buyer must now pay property taxes in 2022 based on the state equalized value of $100,000.00 multiplied by the local millage rate.

 

WHAT IS A TRANSFER OF OWNERSHIP?

Transfer of ownership of property that could result in an uncapping of property taxes includes, but is not limited to, the following:

• A conveyance by deed. MCL 211.27a(6)(a).

• A conveyance by land contract. MCL 211.27a(6)(b).  The transfer of ownership occurs on the date the land contract is entered into, not the date the land contract is recorded or completed and not the date that the deed conveying title is recorded.

• A conveyance to a trust, except for residential real property “if the settlor or the settlor’s spouse, or both, conveys the residential real property to the trust and the sole present beneficiary or beneficiaries are the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(6)(c)(ii).

• A conveyance by distribution from a trust, except for residential real property if “a distribution of residential real property if the distributee is the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(6)(d)(ii).

• A change in the sole present beneficiary or beneficiaries of a trust, except for residential real property where “a change that adds or substitutes the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(6)(e)(ii).

• A conveyance by distribution under a will or by intestate succession, except for residential real property “if the distributee is the decedent’s or the decedent’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(6)(f)(ii).

• “A conveyance by lease if the total duration of the lease, including the initial term and all options for renewal, is more than 35 years or the lease grants the lessee a bargain purchase option.” MCL 211.27a(6)(g).

• “A conveyance of an ownership interest in a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, or other legal entity if the ownership interest conveyed is more than 50% of the corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, or other legal entity.” MCL 211.27a(6)(h).

• “A transfer of property held as a tenancy in common, except that portion of the property not subject to the ownership interest conveyed.” MCL 211.27a(6)(i).

• “A conveyance of an ownership interest in a cooperative housing corporation, except that portion of the property not subject to the ownership interest conveyed.” MCL 211.27a(6)(j).

 

WHAT TRANSFERS OF OWNERSHIP ARE NOT SUBJECT TO UNCAPPING?

For the purposes of uncapping property taxes, the following are not considered “transfers of ownership”:

• “The transfer of property from 1 spouse to the other spouse or from a decedent to a surviving spouse.” MCL 211.27a(7)(a).

• “A transfer from a husband, a wife, or a married couple creating or disjoining a tenancy by the entireties in the grantors or the grantor and his or her spouse.” MCL 211.27a(7)(b).

• “A transfer of that portion of residential real property that had been subject to a life estate or life lease retained by the transferor resulting from expiration or termination of that life estate or life lease, if the transferee is the transferor’s or transferor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the transfer.” MCL 211.27a(7)(d).

• “A transfer through foreclosure or forfeiture of a recorded…, or through deed or conveyance in lieu of a foreclosure or forfeiture, until the mortgagee or land contract vendor subsequently transfers the property.” MCL 211.27a(7)(e).

• “A transfer by redemption by the person to whom taxes are assessed of property previously sold for delinquent taxes.” MCL 211.27a(7)(f).

• “A conveyance to a trust if the settlor or the settlor’s spouse or both, conveys the property to the trust” and “for residential real property, if the sole present beneficiary of the trust is the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(7)(g).

• “A transfer pursuant to a judgment or order of a court of record making or ordering a transfer, unless a specific monetary consideration is specified or ordered by the court for the transfer.” MCL 211.27a(7)(h).

• “A transfer creating or terminating a joint tenancy between 2 or more persons if at least 1 of the persons was an original owner of the property before the joint tenancy was initially created and, if the property is held as a joint tenancy at the time of conveyance, at least 1 of the persons was a joint tenant when the joint tenancy was initially created and that person has remained a joint tenant since the joint tenancy was initially created. A joint owner at the time of the last transfer of ownership of the property is an original owner of the property. For purposes of this subdivision, a person is an original owner of property owned by that person’s spouse.” MCL 211.27a(7)(i).

• “A transfer for security or an assignment or discharge of a security interest.” (e.g. mortgage is paid off). MCL 211.27a(7)(j).

• “A transfer of real property or other ownership interests among members of an affiliated group. As used in this subsection, “affiliated group” means 1 or more corporations connected by stock ownership to a common parent corporation.” MCL 211.27a(7)(k).

• “Normal public trading of shares of stock or other ownership interests that, over any period of time, cumulatively represent more than 50% of the total ownership interest in a corporation or other legal entity and are traded in multiple transactions involving unrelated individuals, institutions, or other legal entities.” MCL 211.27a(7)(l).

• “A transfer of real property or other ownership interests among corporations, partnerships, limited liability companies, limited liability partnerships, or other legal entities if the entities involved are commonly controlled.” MCL 211.27a(7)(m).

• “A direct or indirect transfer of real property or other ownership interests resulting from a transaction that qualifies as a tax-free reorganization under [the Internal Revenue Code].” MCL 211.27a(7)(n).

• “A transfer of qualified agricultural property, if the person to whom the qualified agricultural property is transferred files an affidavit with the assessor of the local tax collecting unit in which the qualified agricultural property is located and with the register of deeds for the county in which the qualified agricultural property is located attesting that the qualified agricultural property will remain qualified agricultural property.” MCL 211.27a(7)(o).

• “A transfer of qualified forest property, if the person to whom the qualified forest property is transferred files a qualified forest taxable value affidavit with the assessor of the local tax collecting unit in which the qualified forest property is located and with the register of deeds for the county in which the qualified forest property is located attesting that the qualified forest property will remain qualified forest property.” MCL 211.27a(7)(p).

• “A transfer of residential real property 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.” MCL 211.27a(7)(t).

• “A transfer of residential real property if the transferee is the transferor’s or the transferor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(7)(u).

• “A conveyance from a trust if the person to whom the residential real property is conveyed is the settlor’s or the settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.” MCL 211.27a(7)(v).

For many of the transfers listed above, the recipient of the real property may be required to provide proof to the Michigan Department of Treasury or the local assessor that the transfer meets the statutory exception to avoid uncapping of property taxes.  A recipient that is required to show proof but fails to do so can be subject to a fine of $200.00.

 

TRANSFER OF PROPERTY REQUIRED TO BE REPORTED TO THE TAX ASSESSOR

“The buyer, grantee, or other transferee of the property shall notify the appropriate assessing office in the local unit of government in which the property is located of the transfer of ownership of the property within 45 days of the transfer of ownership”, whether it is believed to trigger an uncapping event or not.  MCL 211.27a(10).  The new owner must complete Form 2766 (Property Transfer Affidavit) and file it with the city or township assessor where the property is located within 45 days of the transfer.

“If the buyer, grantee, or other transferee in the immediately preceding transfer of ownership of property does not notify the appropriate assessing office as required…, the property’s taxable value shall be adjusted [to the state equalized value] and all of the following shall be levied:”

• “Any additional taxes that would have been levied if the transfer of ownership had been recorded as required under this act from the date of transfer.” MCL 211.27b(1)(a).

• “Interest and penalty from the date the tax would have been originally levied.” MCL 211.27b(1)(b).

• Other penalties may apply if the property is classified as commercial, industrial or qualified agricultural property.

“If the taxable value of property is increased [due to failure of the new owner to report the transfer of ownership], the appropriate assessing officer shall immediately notify by first-class mail the owner of that property of that increase in taxable value.”  MCL 211.27b(6).  “A buyer, grantee, or other transferee may appeal any increase in taxable value or the levy of any additional taxes, interest, and penalties… to the Michigan tax tribunal within 35 days of receiving the notice of the increase in the property’s taxable value.”  Id.  “An appeal [under this rule] is limited to the issues of whether a transfer of ownership has occurred and correcting arithmetic errors.”  Id.  “A dispute regarding the valuation of the property is not a basis for appeal [under this rule].”  Id.

 

UNCAPPED PROPERTY TAXES IS AN IMPORTANT CONSIDERATION IN YOUR PROPERTY TRANSFER, BUT A SKILLED ATTORNEY CAN HELP

If you purchase real property on the open market from a complete stranger, then uncapped property taxes for the new owner are inevitable and expected.

However, uncapping of property taxes may come as a surprise to heirs and beneficiaries under the owner’s estate planning if these rules are not taken into account.  An uncle who conveys real property to a nephew will create an uncapping event because this familial relationship is not considered a valid basis for exemption.  On the other hand, if that uncle adds the nephew as a co-owner under a joint tenancy and subsequently dies leaving the nephew as the sole owner, then the uncapping event may be avoided.  Depending on your desired wishes, there may be a legal strategy available to transfer real estate to another person without triggering an uncapping event and, therefore, minimizing the expenses associated with their newly acquired land.   Before making assumptions that no uncapping would occur under your desired conveyance, you should invest into seeking legal advice with a knowledgeable lawyer to assist you.

If you have any further questions about Michigan property taxes or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.