Monday, November 3, 2014

New limits on uncapping property taxes

A recent law signed by the Governor (Public Act 310) has once again amended MCL 211.27a, the statute which determines when a transfer of real estate will "uncap" the taxable value and allow property taxes to rise.

Under Proposal A, passed in 1994, increases in the taxable value of a parcel of land are "capped" at 5% per year. Over a period of time, if the home increases in value at a higher rate, the "capped" taxable value can be much lower than the "assessed value," which is supposed to be 50% of the home's true value. A home worth $100,000 when it is bought, for example, and worth $200,000 now, may have an assessed value of $100,000 (one-half of actual value) but a taxable value of only $68,000. Since property taxes are calculated as a percentage of the taxable value, the cap results in significant tax savings. Often, the owner is an elderly person, living on a fixed income, who could not afford to pay a higher property tax.

Under the statute, transfer of the land, whether by sale or gift, will often "uncap" the taxable value, allowing it to once again match the assessed value. But there have always been exceptions to uncapping. Early on, exceptions were provided for limited categories of conveyances, including conveyances to and from certain trusts and conveyances creating or ending joint tenancies in certain cases.

A couple of years ago, though, the statute was amended to provide that a transfer (whether by gift or by sale) to certain family members would also be excepted from the uncapping rule. The new section (s) read:
(s) Beginning December 31, 2013, a transfer of residential real property [does not uncap] if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.
This language was far from clear. What was meant by "the first degree"? The reference was obviously to the "first degree of consanguinity" but still needed explanation. Certainly the parent-child relationship was included, but what about transfers between siblings? Some sources say these are also first-degree, but that is not a unanimous view. And what was meant by "change of use"? A change from residential to commercial use is obvious; a change from year-round residential to seasonal use, or vice versa, is less so. In several cases, homeowners have had to go to court to get an answer, resulting in a lot of expense and uncertainty.

On the "first degree" criterion, one source said:
Relationships, through either blood (consanguinity) or marriage (affinity) were recorded, and marriage dispensations were granted, by "degree". A first degree relationship would indicate siblings; a second degree relationship would indicate first cousins. . .
Another source:
The percentage of consanguinity between any two individuals decreases fourfold as the most recent common ancestor recedes one generation. Consanguinity, as commonly defined, does not depend on the amount of shared DNA within two people's genome. It rather counts the number of meioses separating two individuals. Because of the effects of pedigree collapse, this does not directly translate into the amount of shared genetic substance.
There was the answer: simply count the meioses.

The new provision, which will apply to conveyances after December 30, 2014, is much more understandable and has been expanded:
(t) Beginning December 31, 2014, a transfer of residential real property [does not uncap] if the transferee is the transferor’s or the transferor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance. . .
Not only is the relationship criterion made more understandable, the provision now more simply states that the capped taxable value will continue after the transfer as long as the land is not used for "any" commercial purpose.

Whether occasional rental of a cabin would be characterized as a "commercial" purpose will no doubt, once again, have to be decided by the courts when a case arises.