Since 1994, property taxes in Michigan have been capped. This means that if a property becomes more valuable over the years, the property tax will not increase based on the increased value of the property. Instead, property taxes may only increase every year by either the rate of inflation or 5%, whichever is less.
There are some events, known as “uncapping” events, that remove the cap from the property tax. When the “cap” is removed, the property is then valued at the State Equalized Value (SEV), and a new property tax is assessed based on that value. These uncapping events are usually not welcome by property owners as they generally result in higher property values and therefore, significantly higher property taxes.
One of these “uncapping” events occurs when ownership of the property is transferred. For example, when a property is sold to another person, the property tax is “uncapped”. After the property tax is uncapped, the SEV of the property is assessed and that value is used to determine the new property tax.
Although “uncapping” events are generally not welcome, they can especially be frustrating in the transfer of property within a family. This is because the transfer of property within a family is still a transfer of ownership and results in the same “uncapping” of property taxes. Therefore, when property is transferred to another family member, the property tax owed may be significantly higher than if the other family member just kept ownership of the property.
There are a couple exceptions to the “uncapping” event as they apply to the transfer of property. One is when property is transferred as a joint tenancy with right of survivorship. However, if the transfer is not done correctly, the results can be disastrous. An illustration of how things can go wrong is found in the recent Michigan Court of Appeals case, Lewallen v. Township of Porter. In Lewallen, parents transferred property in 2004 to their kids as tenants in common. When the IRS learned of the transfer 7 years later, the IRS notified the owners that the 2004 transfer was an “uncapping” event and issued a revised property tax bill for 2005 until 2011. After being notified, the owners attempted to “correct” the transfer in 2004 and make it a joint tenancy with right of survivorship. The IRS and the Court of Appeals rejected this correction to the 2004 transfer and upheld the revised property tax bill for 2005 to 2011. If the transfer had been done as a joint tenancy with right of survivorship back in 2004, they may have been able to prevent the higher property taxes.
Recently, another exception to the “uncapping” events was added by Public Act 497. This includes when property is transferred to someone that is related to the transferor by “blood or affinity to the first degree”. The new law appears to prevent the type of “uncapping” event that took place in the family transfer in Lewallen. Although the owners in Lewallen actually tried to make an argument for different tax treatment under Public Act 497, the Court rejected the argument because the law did not go into effect until December 31, 2013; long after the transfer in 2004 or the “correction” in 2011.
If you are thinking about purchasing, selling or transferring property and have any questions, please contact the attorneys at Demorest Law Firm.
