Tax Uncapping: What is it and Why You Should Care
Let’s start with a little history. Back in 1994, as part of general tax reform, the voters of the State of Michigan enacted various legislation (called Proposal A), that amended the state constitution to increase the state sales tax and reduced (for the time being) taxes imposed upon residential real estate. This legislation also included a “cap” on future tax increases on residential real property, which was designed to limit the rate of increases in taxable values (and thus future real estate taxes), to the rate of inflation or 5% per year, whichever was less. (Property taxes are calculated by taking the taxable value of the property – which is roughly one-half of what the property is worth – and multiplying such value by the number of mills (a mill is 1/1000thof a dollar) imposed by the local taxing authorities).
This artificial valuation or cap, however, would be “blown off”, and the property taxes would be “uncapped,” whenever the property changed hands; i.e. whenever there was a change in ownership. At that point, the taxable value would be reset to the new sales price in the year after the sale was made (assuming an arms-length transaction), and the subject property would be assessed, going forward, based upon such sales price, plus future valuation increases, limited as set forth above.
Oftentimes, when the property had been held for many decades by the same owner (and thus was artificially under-valued for tax purposes), and then there was a transfer to a relative, upon death, they could not afford to pay the ( much higher) real estate taxes going forward, due to tax uncapping, and the property had to be sold. This was especially true with family cottages and other types of vacation properties that had greatly increased in (assessed) value over the years, yet increases in the (taxable) value had been limited by statute. (Note the difference in the assessed value versus the taxable value on your property, as shown in your own tax statement).
In recognition of this on-going problem, the state legislature began implementing, in 2012, a series of exceptions to the tax uncapping statutes that, for the first time, eliminated tax uncapping for residential real property that was transferred to the grantors child and other close relative(s) within a certain degree of blood relationship to the existing owner(s). In subsequent years, these exceptions were expanded to include relationships by affinity (marriage) and clarification of the exceptions were enacted that, ultimately, allowed residential properties to be transferred by deed (including a so-called Lady Bird Deed), will, trust, or intestate succession (dying without a will) to certain qualified parties, without uncapping the property taxes. These parties now include a transferee who is the transferor’s or the transferor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson or granddaughter, provided the residential real property is not used for any commercial purposes following the transfer. Thus, the new owners may wind up paying the same amount in real estate taxes as was paid by the prior owner (quite often their parent), subject to annual increases as noted above. In the end, this may allow family cottages and other vacation properties to stay in the same family for generations to come.
In order to take advantage of these statutory provisions, a Property Transfer Affidavit (Michigan Department of Treasury form 2766) must be filed by the grantee (buyer). This Affidavit states the familial relationship between the grantor (the prior owner) and the grantee (the new owner) and must be filed with the local assessor within 45 days of the date of transfer. Thereafter, the assessor, or state treasurer, may request additional documentation supporting the claimed relationships between the parties, which should be supplied within 30 days of such request, or a fine of up to $200 can be imposed. Other exceptions may apply to certain qualified agricultural property, qualified forest property, conservation easements, as well as transfers between spouses and into a trust by the settlor (trust maker) or their spouse where such person (or the qualified persons named above) is the sole present beneficiary of the trust. (See MCL 211.27a for qualified parties excluded from tax uncapping and additional exceptions to uncapping).
Keep in mind that these statutory exceptions do not apply to the transfer of ownership to an LLC, partnership, corporation or other artificial entity. They also do not apply to commercial properties, or income producing residential properties (such as rental units). Further, if residential land (like a farm) is simply “split,” and there is no change in ownership, then the taxes levied on the property are not affected. Likewise, if a transfer is made of a portion of a split parcel to a qualified relative, then again, these uncapping provisions do not apply. (If a qualified relative were to subsequently build a home on the part of the property that was split off to them, then the assessor would separately value the new structure for its current true cash value, increasing the total value for the parcel, but the land value component thereof would not uncap).
Finally, if there is no intent or desire to keep the property at issue in the family, as often occurs upon the death of a parent and subsequent sale of their home, then property tax uncapping is not much of a concern. In such case, the property would likely be sold by the Personal Representative in their probate estate, or Trustee of their trust, and there would be a step-up in basis to the date of death value (thus likely eliminating any long or short term gain on the sale). Also, tax considerations, alone, while certainly a concern, should not necessarily be the driving force behind your decision as to the disposition to be made of your property, as many factors should be taken into account.
Nevertheless, you should be aware of the very real possibility that property taxes will uncap upon the transfer of residential property, however that occurs, and the ramifications thereof. If this is a concern, we would strongly recommend that you consult with the knowledgeable professionals at Damon, Ver Merris, Boyko & Witte, PLC, about your particular situation, and ways to avoiding tax uncapping, especially if you value keeping your property in the family for future generations to enjoy. – Larry A. Ver Merris
While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.