Real Estate Transfers: Avoiding property taxes from “uncapping”

Any Michigan real property owner is familiar with paying property taxes each year and has probably noticed two values shown on their property tax bill- the State Equalized Value (SEV) and the Taxable Value.  The State Equalized Value (SEV) of the property is equal to 50% of the true cash value of the property.  The Taxable Value of the property is equal to the SEV, but subject to a “cap” in the annual increase equivalent the inflation rate or 5%, whichever is lower.  The Taxable Value is the value used to determine the property owner’s tax liability each year.  Therefore, even if the true cash value of your property doubled in a given year, the increase in the taxable value of your property would be limited to the inflation rate or 5%, whichever is lower, which would prevent your property taxes from doubling.

So long as the ownership of the property remains the same, the taxable value will remain to be capped each year.  However, when there is a “transfer of ownership” it will cause the property taxes to “uncap.” This means the annual cap imposed on the increase in the Taxable Value of the property is lifted and the taxable value will be increased to equal the SEV of the property the year following the transfer.  This will cause an increase in property taxes, sometimes drastically.

Michigan law currently contains several exemptions to the “transfer of ownership” rules. The exemptions allow property to be transferred without causing the taxable value of the property to uncap. A few of the most common uncapping exemptions follow:

1. Conveyances of residential property occurring between family members, so long as the property is not used for any commercial purpose following the conveyance. Family members are defined as “a mother, father, brother, sister, child, adopted child, or grandchild.” The exemption also includes conveyances from a trust or a decedent’s estate.
2. A conveyance creating or terminating a joint tenancy, so long as one person was an original owner of the property.
3. A transfer from one spouse to another spouse.
4. A transfer of qualified agricultural property, so long as the new property owners continue to use the property as qualified agricultural property and files an affidavit attesting to that with the Register of Deeds.
5. A transfer of property that is subject to a life estate, but only until the life estate terminates.
6. A conveyance to a trust if the sole present beneficiary of the trust is the Settlor or his or her spouse, or both.
7. A transfer pursuant to a court order, so long as no monetary consideration is ordered for the transfer.

Michigan law concerning the uncapping of property taxes upon a transfer of ownership is continuing to evolve. Every property owner’s situation is unique and I recommend contacting an attorney to help evaluate your particular situation before proceeding with any real estate transfer.