TAXABLE VALUE ON TRANSFER OF REAL PROPERTY TO FAMILY MEMBERS CAPPED

by Justin Van Den Heuvel

The laws for transferring real estate, and the tax laws that pertain to the transfer, are very complicated. If things weren’t already complex enough, the state of Michigan changed the law regarding certain caps on transfers of real property to certain family members a couple of years ago. While the change is indeed positive for those who want property to stay within the family, the law can be a bit confusing to understand. Here’s what you need to know–

First: Understanding Important Terms

Before the effects of the new law can be explained and understood, it is important to understand a few terms first:

• Transfer (of residential real property): Transfer of ownership is a pretty simple concept to understand, and refers to a situation in which (in this case) residential real property, such as a condo or family cabin, is transferred from one owner to another.
• State Equalized Value (SEV): SEV is a bit more complicated, and refers to one-half of a property’s true cash value. As such, the SEV changes every year with fluctuations in the real estate market
• Taxable Value (TV): The taxable value is the value that is used to calculate how much a person will pay in property taxes. The taxable value in Michigan is capped at five percent, or the rate of inflation, whichever is less. However, this cap is lifted when the property’s ownership is transferred during a previous tax year.

The Relationship Between Transfer of Property, SEV, and TV

It is important to understand the relationship between transfer of property, SEV, and TV. Remember that normally, the TV is capped at a maximum of five percent, and that SEV is based on the market. This means that over the years, the SEV will typically increase faster than the TV (based on the cap), with a big gap developing between the two values over the years. As such, when an owner goes to transfer the property and the SEV is greater than the TV, the TV will be uncapped, and the new owner will have to pay higher property taxes on the property as such.

So Why Does this Matter and What’s the New Law?

Michigan has had, for some time now, laws that make exceptions to the cap. For example, when qualified agricultural property has been transferred, the TV has remained capped, making the property much more affordable for the new owner.

Up until recently though (and the introduction of the new law – first passed in 2013 and amended in 2014), property that was transferred amongst family members was uncapped. So, picture a situation in which parents want to leave their kids a property that’s been in the family for years, but has appreciated to the point that when the cap is lifted on the TV, the TV is unaffordable. The new law changes that – now, property that is transferred to an immediate family member remains capped. As found in Michigan code, immediate family members include a party’s and their spouse’s grandchildren, siblings, adopted children, biological children, and parents.

Have More Questions?

If you want to learn more about transfer of ownership laws as they apply to residential real property and caps on taxable value, or if you have questions about how to transfer real property, please contact our experienced real estate lawyers at the Van Den Heuvel Law Office today.

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