New Exemptions to Avoid Property Tax Uncapping

A recent change in Michigan law offers important new planning opportunities for owners of cottages and other residential family property. The change has made it significantly easier to transfer residential real estate (including recreational lands) from one generation to the next without unfavorable tax consequences. Specifically, the recently enacted law provides new exemptions for residential real estate owners to transfer property to relatives without triggering an “uncapping” of the property taxes.

Why is a transfer of ownership significant with regard to property taxes?

Here’s the gist of it: Property taxes are determined by an individual property’s taxable value. As the taxable value increases, so too the property taxes. Under Michigan law, the annual increase in a property’s taxable value is capped while it is owned by the same person. Whenever a “transfer of ownership” occurs, however, the taxable value of the transferred property “uncaps” in the following year and is re-set based on the current market value. MCL 211.27a.

In some cases, the resulting increase in property taxes is so significant that future generations can no longer afford the transferred property. There are a number of exemptions to the definition of a “transfer of ownership” for taxable value uncapping purposes, but prior to the recent legislative changes, these exemptions were difficult to navigate and sometimes risky propositions. Fortunately for property owners, the new law expands these exemptions and makes it much easier to avoid an increase in property taxes because of the uncapping of a property’s taxable value.

What are the new property tax uncapping exemptions?

Public Act 310 of 2014, effective December 31, 2014, allows an owner of residential real estate to transfer his or her property to eligible family members without triggering an uncapping event. If residential real property is transferred directly, it can pass to the transferor’s spouse, parents (including parents of a spouse), siblings (including siblings of a spouse), children (including adopted children and children of a spouse), or grandchildren (including grandchildren of a spouse) without uncapping the property’s taxable value for purposes of property taxes. For this exemption to apply, however, the use of the residential real property must not change.

The new law also expands the methods by which an owner may transfer residential property to eligible family members. The transfer may occur either during the owner’s lifetime or after his or her death (by intestate succession or through a will or trust). This is an important development because trusts and probate estates were previously subject to uncapping. Parents can now maintain their residential real estate during their lifetimes and transfer it to their children upon their deaths without burdening the future generation with negative tax consequences.

In sum, the recently enacted law offers many more options for property owners to transfer their residential real estate to a wide variety of family members without triggering an uncapping of property taxes. While older strategies to avoid uncapping may still be effective, property owners may want to explore taking advantage of the opportunities the new law makes available.

If you would like to learn more about these changes, contact the experienced attorneys at Dingeman & Dancer, PLC, 100 Park Street, Traverse City, MI 49684; (231) 929-0500; [email protected].