How to Keep the "Cap" on Family Residential Real Estate Transfers: Important Update
Article by Peter Kosydar
On Thursday, October 9, 2014, HB 5552 was signed into law by Governor Rick Snyder. This new legislation, which will become effective as of December 31, 2014, will significantly reduce taxes on future generations inheriting residential real property.
To understand the significance of this new legislation, some background is needed on the issue of “uncapping” residential real estate for purposes of property taxes: In 1994, the Michigan legislature passed a law “capping” the taxable value of property, meaning that property values for tax purposes can only increase by the lesser of five (5%) percent or the inflation rate each year. This “capping” legislation substantially reduces a homeowner’s property taxes over time, as real property (especially cottages and lake front properties) often appreciates at a much higher rate than five (5%) percent per year, making the property’s taxable value much less than its true cash value.
The problem with this “capping” legislation is that when residential real property is sold or ownership is transferred, the taxable value is “uncapped” and reset at fifty (50%) percent of the property’s true cash value. This typically results in the new owners of residential real property having to pay substantially higher property taxes based on the fair market value of the property at the time of transfer. Without an exception for transfers to children, this created a major problem for parents trying to pass their real property onto future generations, as property taxes dramatically increased with the transfer of ownership.
In 2013 the Michigan legislature attempted to rectify this problem by creating an exception to the definition of a “transfer of ownership” for purposes of “uncapping” which allowed residential real property to be transferred without “uncapping” for tax purposes if the transferee of the property is related to the transferor “by blood or affinity to the first degree.” However, while the 2013 legislation was a step in the right direction since it exempted lifetime transfers to spouses, parents, siblings, children, and grandchildren, it was interpreted not to apply to transfers through a trust or probate estate.
HB 5552 addresses the shortcomings of the 2013 legislation by removing the “blood or affinity” language from the exception and explicitly excluding “a conveyance from a trust” from the definition of a “transfer of ownership” if the property is conveyed from the trust to the settlor’s spouse, parent, sibling, child, or grandchild. Therefore, beginning on December 31, 2014, if residential real property is transferred from a trust or by inheritance under a will, it can pass to the transferor’s spouse, parents, siblings, children, or grandchildren without “uncapping” its value for purposes of property taxes. This is a significant development in that parents can now maintain their residential real property during their lifetimes and transfer it to their children at their deaths without triggering negative tax consequences on future generations. It is important to note this new exception under the 2014 legislation still does not include transfers from a limited liability company.
If you own a home, cottage, or lakefront property in the state of Michigan, you should take advantage of this new legislation in your estate plan to conveniently pass on your property to future generations while minimizing your family’s future property tax burden. For many people, this is an important opportunity you probably won’t want to miss. Contact us for more information.