Changes to Michigan Property Tax Law Allow Owners to Avoid Uncapping

Effective December 31, 2014, Michigan property owners will be able to more readily transfer their real property without having the taxable value increase. The new law, signed by Governor Snyder in October, is a fix to a convoluted 2012 law that changed the way local tax officials determined the taxable value of residential real estate upon its transfer. The new law allows owners to transfer property to certain relatives and certain trusts without uncapping the taxable value of the property.

TRANSFER OF OWNERSHIP UNCAPS TAXABLE VALUE

            Michigan law caps the taxable value of residential real property between “transfer[s] of ownership.” For example, if a person buys a 40-acre plot of land valued for tax purposes at $40,000, the taxable value of the property will not increase with any increased value in the property, unless there is a “transfer of ownership,” as defined by statute. If the value of the land increases to $80,000, the owner will still be taxed at the value of the land at the time of the previous transfer–$40,000. If there is a “transfer of ownership,” the taxable value of the land uncaps, leaving the new owner to pay property taxes at the higher taxable value.

2012 P.A. 497 AND THE STATE TAX COMMISSION

            The Michigan Legislature altered Michigan property tax law to exempt from uncapping a greater number of transfers to family members in 2012. The law exempted from uncapping transfers to family members related “by blood or affinity to the first degree.” This language led to confusion as to whether transfers to trusts were included, which the State Tax Commission (“STC”) ultimately resolved by deciding that transfers to trusts, limited liability companies, and family partnerships uncapped the taxable value of the transferred property.

TRANSFERS TO RELATED PERSONS

            In October of 2014, the Michigan Legislature expanded and clarified the exemptions originally introduced in 2012. The law exempts from the definition of “transfer of ownership” transfers to the following persons related to the transferor or the transferor’s spouse:

• Mother;
• Father;
• Brother;
• Sister;
• Son;
• Daughter;
• Adopted son;
• Adopted daughter;
• Grandson; or,
• Granddaughter.

The property must also be used for residential purposes after the transfer. Converting the property for commercial use will uncap the taxable value.

OTHER EXEMPT TRANSFERS

            The 2014 law also exempts a number of other transfers from uncapping, of which the taxpayer must present evidence to the Department of Treasury within 30 days of transfer, including:

• A conveyance to a trust where the beneficiary or distributee is the settlor’s mother, father, brother, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential property does not change;
• A conveyance by distribution from a trust to a distributee where the distributee is the settlor’s mother, father, brother, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential property does not change;
• A change in the sole present beneficiary or beneficiaries of the trust based on an event like the death or disability of a settlor or beneficiary where the beneficiary is the settlor’s mother, father, brother, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential property does not change;
• A conveyance by a will where the beneficiary or distributee is the testator’s mother, father, brother, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential property does not change; or
• A conveyance by intestate succession where the distributee is the settlor’s mother, father, brother, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential property does not change.

GOOD NEWS AND BAD NEWS

            The new exemptions provide owners of residential real property with new methods of avoiding substantial increases in taxable value of their land, leaving them to engage in more thorough estate planning without the fear of uncapping. However, this law could affect local government entities, including school districts, by locking-in depressed taxable values for decades.

            Jacob D. Lynch is an attorney at Ryan Law Offices in Iron Mountain, Michigan, where he specializes in helping individuals and businesses plan for the future. This article should not be relied upon as advice for your specific situation. Please contact Jacob at (906) 774-3808 with any specific questions.