Property Capping and Uncapping In Michigan
Property values in desirable northern Michigan have risen dramatically in recent years and real estate experts expect prices to continue rising. This trend has been especially prevalent in coastal cities and towns on the Great Lakes, and with cottages and cabins near inland lakes, streams, and rivers.
Property taxes, tied to property values, should be rising as well—but thanks to legislation passed in 1994, Michigan property owners have benefited from tax capping. Are you benefiting, or can you benefit, from tax capping your home?
What Is a Property Tax Cap?
A property tax cap is a maximum percentage that property taxes may be increased on a property per year. In Michigan, the cap is 5% or the rate of inflation, whichever is less. For example, the inflation rate used to calculate property tax increases in 2021 was 1.4%, meaning the capped increase would have been equal to that. In 2022, the capped increase is 3.3%, representing the largest capped value rate increase since 2009.
Due to the cap, the taxes on a property in Michigan do not rise in equal proportion with the property’s value, as they would elsewhere. For example, a home’s market value could be $500,000 but only have a taxable value of $150,000. However, property taxes are uncapped when ownership is transferred under most circumstances, like a traditional sale or in some types of inheritances.
What Happens When Taxes Uncap
When property taxes uncap, the property taxes reset to the market value of the property one year after the sale. In some instances, particularly in cases involving waterfront property where values have recently increased by as much as 10%, the new property taxes can become cost-prohibitive for the new owners or inheritors. This often results in families being faced with the tough decision to sell the family cottage.
What Is a Cap Exemption for Property Taxes
A property tax cap exemption applies to some types of sales or inheritances. In a cap exemption scenario, the property remains capped, meaning that the taxes will not be increased after the property transfer to match the market value of the property. Instead, the benefit of the capped rate carries over to the new owners or inheritors.
Uncapping Michigan Property Taxes
Public Act 310 of 2014 became effective on December 31, 2014 and was enacted to help property owners transfer their property to eligible family members without triggering the uncapping of their property taxes.
The law requires specific criteria be met for a property to transfer without uncapping the taxable value:
- Family Member Eligibility: Ownership can pass to the spouse, parents (of the current owner or spouse), siblings (of the current owner or spouse), natural or adopted children (of the current owner or spouse) or grandchildren (of the current owner or spouse)
- The Usage of the Property Can’t Change: Turning your grandparents’ summer cabin that you inherited into a bed and breakfast seems like a good idea, but this would change the usage from residential to commercial, subjecting the property to uncapping.
Beyond defining who the property may be transferred to without being subjected to uncapping, Public Act 310 of 2014 expands when property can be transferred:
- During the Owner’s Lifetime: If the post-transfer owner of the property is what the law considers “a first degree relative,” then the property isn’t considered to be a new owner, even if the previous owner is still alive.
- After Death: If you establish a Living Trust, a Ladybird Deed or a Will, your property can be passed after your death without your inheritor being subjected to raised tax rates. This is a big change to the way that things were in the past, but now property can be passed without an increased tax burden.
How to Avoid Uncapping Michigan Property Taxes
The best way to avoid property tax uncapping at your family’s property is to work with a reputable estate planning attorney. Well-versed and deeply experienced in all aspects of estate planning, the team at Dingeman & Dancer, PLC will work with you and your loved ones to make sure the family cottage stays in the family for generations to come.