The Michigan General Property Tax Act, MCL 211.1 - 211.157, provides that real property in Michigan will be assessed yearly and taxed at one-half (1/2) of its true cash value (market value). The Headlee Amendment to the Michigan Constitution in 1994, however, placed limitations on how much the assessments and taxes could be increased each year. This is referred to as the "capping." Until there is a "transfer of ownership," as defined by law, annual property tax increases have been "capped" and can only go up at the levels specified in the Act. After a transfer of ownership, the property can be reassessed at its current market or "true cash value" and taxes can increase substantially for the new owner. The property tax assessment begins at the new higher level, but can again rise only to the "capped" levels until the property is again transferred.
State Equalized Value (SEV)
Michigan property tax bills show a "Taxable Value" and a "State Equalized Value." The Taxable Value is the capped value upon which the property tax is assessed. The State Equalized Value (SEV) is supposed to be one-half (1/2) of the true cash value or market value of the property. So in estimating the value of a property, it is not uncommon to look to the value of two times the SEV. This is not always a reliable figure and when the value is important a professional assessment should be done.
After a "transfer of ownership" when the property tax assessment is uncapped, the State Equalized Value and the Taxable Value become the same for that year in which the uncapping occurred. The cap goes back into effect for that property at the new level.
Transfer of Ownership
A transfer of ownership is a conveyance of title to, or a present interest in, real property. Not all conveyances involve a transfer of ownership for the purpose of taxation under Michigan law. Certain transfers avoid the assessment adjustment. The exemptions include transfers between or excluding spouses, and transfers subject to a life estate or to include in one's own trust. Others are found at MCL 211. 27a(7)(a-n).
Estate Planning Opportunities
One exclusion is for a transfer creating or ending a joint tenancy if at least one person, or his/her spouse, is an original owner of the property. Therefore, if two or more people own real estate jointly and one dies, the property is not uncapped if the surviving owner was an owner with an "original owner." This means that owners of highly appreciated real estate that is benefiting from the capping can avoid causing the property assessment to uncap at their death by adding joint owners while they are alive.
This is not suitable in every case. Joint ownership involves a number of hazards if the joint owner turns out to be unreliable or has creditors who could attach the property. On the other hand, it could mean that members of the next generation could afford to keep property in the family rather than have vacation property, for example, become prohibitively expensive. Consultation with an attorney to review your specific situation is a must.
This exclusion was affirmed in a Michigan Supreme Court case decided in 2009. Klooster v City of Charlevoix, 286 Mich App 435 (2009). The Court, however, has agreed to review its decision. There is also considerable pressure from municipalities to encourage the legislature to clarify the rule to prevent this type of planning since eliminating this exclusion would bring in increased revenues in this period of declining property values and corresponding decline in property tax income. We would hope that if these arrangements were made by property owners, they could continue to rely on the law as it was at the time of titling regardless of any later changes. There is no guarantee, however.
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