Michigan’s Principal Residence Exemption Clarifies Who Can Purchase As an “Owner”

Michigan residents who own and occupy real estate as their principal residences can qualify for the Principal Residence Exemption (PRE), formerly known as the Homestead Exemption.   

The PRE can be quite valuable because it exempts the principal residence from up to 18 mills of taxes levied by a local school district for operating purposes. Guidelines published by the Michigan Department of Treasury provide answers to frequently asked questions; please note, however, that these guidelines do not have the force of law.  

Defining “Principal Residences” and “Owners” 

Only the owner of a particular piece of Michigan real estate can claim the PRE, and that real estate must be the owner’s principal residence. The applicable state statute defines “principal residence” as “the 1 place where an owner of the property has his or her true, fixed, and permanent home to which, whenever absent, he or she intends to return and that shall continue as a principal residence until another principal residence is established.”   

An owner can claim the PRE on only one property. You are considered an “owner” of the real estate not only if you own the property in fee simple title, but also if you are purchasing it under land contract, you are the partial owner of the property, you have transferred the property to a revocable trust or personal residence trust, or other less frequently occurring situations.  

Beneficial Interests in Real Property 

The extent of “ownership” through receipt of a lifetime beneficial interest in real estate pursuant to a trust was recently explored by the Michigan Court of Appeals.   

In its June 7, 2018, decision in Breakey v. Dep’t of Treasury, the Court of Appeals reversed the decision of the Michigan Tax Tribunal and found that a decedent’s widow qualified as an “owner” for purposes of the PRE, even though she did not receive the subject real estate outright following her husband’s death, but was instead given the ability to remain in the marital home rent-free pursuant to the terms of her husband’s trust.   

The court determined that the widow qualified as an “owner” under the PRE because she held the property as a beneficiary of the trust. Reaching its conclusion, the court noted that the word “own/owns” is undefined in the statute’s “owner” definition and that prior decisions by the Court of Appeals and Michigan Supreme Court held that to “own” real estate can include other than a fee simple interest.  

In Breakey, the widow “owned” the subject real estate through her beneficial interest, satisfying the definition of an “owner” according to MCL 211.7dd(a)(iii). The Court of Appeals remanded the matter for a determination as to whether the subject real estate qualified as the widow’s principal residence. 

Although the Breakey decision should lend certain clarity to ownership issues when less than fee simple interests are received via trusts, some ambiguity remains. If your estate planning goals include giving a beneficiary, including a spouse, the opportunity to claim the PRE with respect to an interest other than outright fee ownership, please consult a Kreis Enderle attorney to discuss your situation.