Property tax assessments seem to be going up and up. Local tax assessors are on the lookout for opportunities to “uncap” property assessments, which increase the property taxes on your real estate.
Since Michigan adopted Proposal A in 1994, the annual increase in the taxable value of a parcel of real estate is 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. Once there is a transfer of ownership, the taxable value is uncapped and increases to the SEV.
A colleague of mine, attorney Harley Manela, has some tips to avoid uncapping property tax assessments and I summarize some of them here.
Tip 1: Record that deed.
In the past, for estate planning purposes to avoid uncapping and to avoid probate, some attorneys would prepare deeds, have them signed, but tell you not to have them recorded until later or after your death. This has always been a questionable strategy. Not only could the deed get lost, mislaid or forgotten, there was a question of whether the deed was “delivered” before death. As of 2006, it has been clear that this type of planning does not work when the Michigan Tax Tribunal held that there is a transfer of ownership when the deed is signed. This triggers an uncapping (unless one of the exemptions applies) and the property owner will have to pay increased adjusted taxes, interest, and penalties back to the date of the signing.
Tip 2: Use your trust.
If you have a revocable living trust, deed your property to your trust. Not only will this avoid probate, your tax assessment will remain capped and your homestead so long as your trust is drafted properly. And also make sure your homeowners insurance names your trust as additional insured.
Tip 3: Use a transfer on death deed.
If you do not have a trust, or you want to apply for Medicaid to pay for your nursing home care, the use of a transfer on death deed, also called a Ladybird deed, prevents uncapping, continues the homestead exemption, avoids probate and avoids the Medicaid payback estate recovery.
Tip 4: Transfers to certain relatives not an uncapping
A transfer of your residential real property does not result in uncapping if the person to whom it is transferred is your or your spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the use of the residential real property does not change following the transfer.
Tip 5: Be careful with LLCs
Certain transfers of property between individuals and a limited liability company (LLC) may cause an uncapping. When using LLCs, get proper advice to prevent the uncapping.
By Matthew M. Wallace, CPA, JD
Published edited May 1, 2017 in The Times Herald Savvy magazine, Port Huron, Michigan as: Preventing uncapping property taxes