New Supreme Court Ruling Makes It Easier For Sellers To Obtain A Tax Refund

New Supreme Court Ruling Makes It Easier For Sellers To Obtain A Tax Refund

Article by David Hill

The Michigan Supreme Court just made it easier to obtain a tax refund for certain real estate transactions in Michigan. Pursuant to Michigan’s State Real Estate Transfer Act, the State of Michigan places a transfer tax of .75% on all real estate transfers that do not fall into certain exceptions. To provide homeowners a form of relief from a declining real estate market, the Michigan legislature enacted MCL 207.526(u), which exempts the sale of certain principal residences from this transfer tax.

To qualify for this exemption, a seller must prove that: 1) the property was his/her principal residence; 2) the transfer tax was paid; 3) the property’s state equalized valuation (“SEV”) on the date of sale was less than or equal to the SEV of the property on the date it was purchased; and 4) the sale price of the property did not exceed the property’s “true cash value.”  If a seller has met all of the requirements above, they are eligible for a refund of any transfer tax paid. 

However, a problem arose in determining the “true cash value” of property. Originally, the Attorney General stated that any property that sold for more than twice its SEV was in excess of the true cash value. The Michigan Court of Appeals took this further, and stated that only sales of a principal residence that sold for exactly twice as must as the SEV were eligible for a transfer tax refund.  The Michigan Supreme Court recently reversed this decision. In its holding, the Court stated that the “true cash value” of a piece of property is “a price at which a willing buyer and a willing seller would arrive through arm's-length negotiation."  In other words, as long as the home sold for fair-market value, the “true cash value” requirement for the tax exemption is met.

In addition, a tax refund is also available to certain buyers, regardless of principal residence status. Last year, the Sixth Circuit extended exemptions of the State’s transfer tax to include transfer taxes normally incurred in the sale of any foreclosed home where the mortgage was held by either Fannie Mae or Freddie Mac. This exemption applies to buyers, as well as sellers.  Banks foreclosing on behalf of Fannie or Freddie will often contract the obligation for any taxes to the buyers, which is why a buyer may have paid the State’s transfer tax, which is why this exemption is extended to buyers.

If you qualify for a tax exemption or need more information, please contact David Hill at dhill@kreisenderle.com.

Posted on September 16, 2015
Tagged as Tax Law