Transfer of real property to a first-degree relative is not a transfer of ownership
While becoming law with seemingly little media attention, changes to property tax law have potentially big impacts on Michigan families.
January 21, 2015 - Author: Brad Neumann, Michigan State University
The beginning of one year and the close of another is often a time of reflection on the past 12 months. For a Michigan State University Extension educator in local government, it is a time to reflect on the past 12 months of legislative action and changes to Michigan law! There is a useful feature on the Michigan Legislature website for this purpose – the Public Act Tables by year. At least one bill (HB 5552) passed through the legislature without much attention in the news and is deserving of some greater coverage.
In 2014, the Michigan Legislature passed PA 310 (which amended MCL 211.27a of the General Property Tax Act) and took effect December 31, 2014 (technically, PA 497 of 2012 had similar, but not as extensive of provisions and went into effect in 2013). The law expands the list of ‘transfer of ownership’ exemptions that might apply when a piece of real property changes hands. Specifically, the law change provides property tax uncapping relief for transfers of real property to immediate family members.
Recall that real property in Michigan has a Stave Equalized Value (SEV) and a Taxable Value (TV) (in addition to an assessed value). The SEV is calculated annually as one-half of a property’s true cash value. The SEV moves up or down with changes in the real estate market. The TV is the value used to calculate property taxes. Over a period of time with increasing property values, the SEV increases faster than the TV, because the TV is ‘capped’ and can only increase annually by the rate of inflation or 5 percent, whichever is less. In time, a sizeable gap between the two values can develop. If the ownership of a property changes and the SEV has outpaced the TV, the change of ownership ‘uncaps’ the TV to increase to the SEV at the time of transfer and the new owner will pay higher property taxes on the uncapped TV.
For many years there have been exemptions to transfers of ownership in which the TV is not uncapped when property changes hands; a transfer of qualified agricultural property is one such exempt transfer. However, transfers between family members have generally not been among those exemptions. Many families have experiences in which the family cottage, cabin, or lakefront property that grandparents or great-grandparents purchased for next to nothing has grown in such great value that the uncapped TV is unaffordable for the average household income. With the change in law, now that cherished family property is less likely to leave the family because the TV will remain capped, so long as it is transferred to an immediate family member and the residential classification and use of the property does not change.
Consider one scenario. The owners of a residential real property transfer it to their adopted daughter. Is this considered a transfer of ownership? No, a transfer of property is not a transfer of ownership if the transferee is related to the transferor by blood or affinity to the first degree, as such, the TV will not be uncapped. A transfer of residential real property is not a transfer of ownership if the transferee has one of the following relationships to the transferor: spouse, father or mother, father or mother of the spouse, son or daughter, including adopted children, son or daughter of the spouse and stepchildren, stepmother or stepfather, grandson or granddaughter. In order to prove the relationship is that of the first degree, the assessor or the Department of Treasury can request the transferee to furnish proof within 30 days that s/he meets the requirements.
Many Michigan families will find the change to property tax law very favorable – allowing residential property that has been in the family for years and has been the source of many positive memories to continue to do just that for the next generation. To learn more about this opportunity, review the State Tax Commission’s Transfer of Ownership Guidelines. Also, readers are strongly encouraged to consult with a real estate and/or tax attorney if considering transferring property under this statutory provision.