Starting January 1, 2015, keeping the home in the family has become easier. Many family transfers will no longer result in the uncapping of the property taxes, making the property more affordable for the family.
Since Michigan adopted Proposal A in 1994, the increase in the taxable value of a parcel of real estate was limited or “capped” at the lesser of 5% or the rate of inflation. Even though the local assessor’s State Equalized Value (SEV) could continue to go up, the taxable value of the parcel remained capped until there was a transfer of ownership. The SEV is roughly one-half of the parcel’s market value.
Upon a transfer of ownership, the property becomes “uncapped”, and the taxable value increases to the then current market value or SEV. This uncapping could be devastating for families upon the transfer of the property either before or after a death. The family cottage or lake-front home could instantly become unaffordable when the property taxes increase based upon the then current market value.
This all changed at the beginning of this year. Effective for transfers after December, 31, 2014, transfers to certain family members are exempted and no longer considered a “transfer of ownership” that would uncap the taxable value of the property.
Under the current law, certain family members that are exempted and considered eligible transferees are the owner’s spouse and the owner’s or the owner’s spouse’s mother, father, sister, brother, daughter, adopted daughter, son, adopted son, or grandchild.
The transfer does not have to be directly from the owner. Transfers from the owner by will or trust can be made without uncapping the property. The following transfers will generally not result in uncapping:
- Transfers into a trust in which the beneficiaries are the owner or eligible relatives.
- Distribution of property from a trust to the owner or eligible relatives.
- A change in the current beneficiary of a trust to eligible relatives.
- Distribution of property by will or intestate succession to eligible relatives.
There is one caveat however. In order to prevent uncapping, the property must be used for residential non-commercial uses. Although there are still some ambiguities in the new law, it goes a long way in protecting the family homestead or cottage and helps to keep it in the family.
By: Matthew M. Wallace, CPA, JD
Published edited in Savvy magazine August 2015 as Keeping Home in Family Easier