New Michigan Law Avoids “Uncapping” in Family Transfers

Two years ago in March, I reported here on the Klooster v City of Charlevoix case, which addressed the issue of "uncapping" in a real estate transaction between family members. 1994 amendments to the Michigan Real Property Tax, placed a "cap" on the amount a taxing authority could increase the value of real property under consistent ownership. Under the 1994 rules, a taxing authority may raise the taxable value of real property no more than the lesser of 5% and a CPI calculation.

The principal change is new sub-paragraph (s) which provides a new exception for residential real property transferred to a relative who is related by blood or affinity to the first degree (i.e., children)

However, when there is a "transfer" of ownership in real property, the taxing authority may "uncap" the valuation for the "tax day" immediately following the transfer, raising the taxable value as high as the state determined State Equalized Value (SEV) of the property. This can be a considerable increase in taxes for the new owner.

The Klooster Court interpreted the transfer provisions of the statute, holding that where a father added his son as a "Joint Tenant with rights of Survivorship" while the father was alive and while the father remained a joint owner, there was no transfer. That seems to track with the plain language of the exceptions to "transfer" in the statute. In what was a surprise to many of us (most certainly to the City of Charlevoix and municipal entities around the state), the further held the death of the original joint owner (the father) was not a transfer. This lead to a new (for some of us at least) avenue of planning and caused us to re-think our planning strategies see, Some Family Cottage Strategies in Light of the Klooster Case; my follow up to the Klooster article.

Perhaps in response to Klooster and the uncertainty that surrounded its reasoning, and certainly to protect family interests in family-owned residential real estate, the Michigan Legislature passed, and Governor Snyder signed into law in December of 2012, a newer, clearer exception to the "transfer" for family-owned real property. House Enrolled Bill No. 4753, signed into law on December 27, 2012, amends Section 27a(7) of the Michigan General Property Tax Act (MCL 211.27a) to provide several new exceptions. Most are clarifications of existing exceptions.

The principal change is new sub-paragraph (s) which provides a new exception for residential real property transferred to a relative who is related by blood or affinity to the first degree (i.e., children). Notably, the exception does not limit itself to "cottage" or "vacation" property. Nor are the number of instances or parcels limited. Indeed, the Senate Fiscal Agency's "Bill Analysis" acknowledges that the exception is not limited to "homesteads," nor is there any limit to the number of times a single parcel could be transferred to first-degree relatives.

Caution!

It is important to note that this new transfer exception does not become effective until December 31, 2013! Thus, for owners dying before December 31, it may still be wise to consider the strategies discussed at the link above, at least temporarily. Still, this is a welcome change for owners of family real property, particularly in those instances of homesteads and family cottages that may have remained in the family for multiple generations. Like all legal changes, this development will require planners to consider whether old strategies remain viable and what, if any, new strategies may come into play.