The transfer of real estate 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 significant impacts on Michigan families.
The start of one year and the end of another is often a time to reflect on the past 12 months. For an educator at Michigan State University Extension in Local Government, it’s 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 – Tables of Public Acts by Year. At least one bill (HB 5552) passed the legislature without much attention in the news and deserves more coverage.
In 2014, the Michigan Legislature passed PA 310 (which amended MCL 211.27a of the General Property Tax Act) and went into effect on December 31, 2014 (technically PA 497 of 2012 had similar provisions, but not as extensive and entered into force in 2013). The law expands the list of “transfer of ownership” exemptions that could apply when real estate changes hands. Specifically, the amendment to the law provides for an uncap on property tax for transfers of real estate to immediate family members.
Recall that real estate in Michigan has an Equalized Reach Value (SEV) and an Assessed Value (TV) (in addition to an Assessed Value). The SEV is calculated annually as half of the actual cash value of a property. The SEV moves up or down with changes in the real estate market. TV is the value used to calculate property taxes. Over a period of time when property values increase, the SEV increases faster than the TV because the TV is “capped” and can only increase annually by the rate of inflation or 5%, whichever is lower . Over time, a significant discrepancy between the two values can develop. If ownership of a property changes and the SEV has overtaken the TV, the change in ownership “uncaps” the TV to switch to SEV upon 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 ownership changes hands; a transfer of qualified farm property is one such exempt transfer. However, transfers between family members are generally not included in these exemptions. Many families have had experiences in which the family cottage, cabin, or lakefront property that grandparents or great-grandparents bought for next to nothing has become so valuable that uncapped television 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 television will remain capped, as long as it is transferred to an immediate family member and the residential classification and use of the property don’t change.
Consider a scenario. The owners of a residential building transfer it to their adopted daughter. Is this considered a transfer of ownership? No, a transfer of ownership is not a transfer of ownership if the transferee is related to the transferor by blood or by marriage in the first degree, as such, the TV will not be uncapped. The transfer of residential property is not a transfer of ownership if the transferee has one of the following relationships with the transferor: spouse, father or mother, father or mother of spouse, son or daughter, including adopted children , son or daughter of spouse and stepchildren, stepmother or stepfather, grandson or granddaughter. In order to prove that the relationship is that of the first degree, the expert or the Treasury Department may ask the transferee to provide proof within 30 days that he meets the conditions.
Many Michigan families will find the property tax law change very supportive – allowing residential property that has been in the family for years and has been the source of many positive memories to continue to do so for the next generation. To learn more about this opportunity, see the State Tax Commission’s Property Transfer Guidelines. Additionally, readers are strongly encouraged to consult a real estate and/or tax attorney if considering transferring property under this legal provision.
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