Tax Considerations When Renting Property and the Principal Residence Exemption
One of a landlord’s many responsibilities is paying taxes, including income and property taxes. You can often partially offset your tax obligations with credits, deductions, or exemptions. In Michigan, if you rent out part of your principal residence, or even if you rent out the entire property on a short-term basis, you still may be able to claim the Principal Residence Exemption (PRE).
The PRE is sometimes called the Homestead Exemption and is easy to confuse with the Homestead Credit. The two are completely different, however. The latter is an income tax credit available to homeowners in Michigan whose income and resources fall below a certain limit. Conversely, the PRE is a property tax exemption governed by Michigan’s General Property Tax Act (MCL 211.1 to 211.157) (GPTA). It exempts a residence from a portion of local school district taxes.
A homeowner must file an affidavit with the local tax collecting unit to claim a PRE. If you previously claimed a PRE and no longer use the home as a principal residence, you must file a Request to Rescind with the local assessor within 90 days of the change. Failure to file on time could result in a penalty.
Annual Principal Residence Exemption Audits
The Michigan Department of Treasury conducts annual audits to ensure only eligible persons receive PRE exemptions. Audits take place in select counties and generally cover the current tax year and the three immediately preceding years. If you receive a PRE Audit Letter and Questionnaire from the department, you will have 30 days to complete and return it.
A PRE denial can result in additional taxes and interest going back up to four years. If you disagree with the denial, you have 35 days to file a written request for an informal conference with the Department of Treasury. If the department denies your appeal, you can file a further appeal within 35 days with the Michigan Tax Tribunal (MTT). If your county or local unit assessor has issued a PRE denial notice, you must appeal directly to the MTT instead of first going through the Department of Treasury. The Michigan Court of Appeals hears appeals from MTT decisions.
Property Rentals and Principal Residence Exemptions
Property must be owner-occupied to qualify for a PRE, as defined in MCL 211.7dd. It must be the owner’s principal residence, and the owner cannot claim “a substantially similar exemption on property in another state.” MCL 211.7cc (3). In assessing whether a home is a taxpayer’s principal residence, the Department of Treasury considers where the homeowner is registered to vote, the address on the owner’s driver’s license and income tax returns, and where children attend school.
You cannot claim a PRE on a home if you are renting the entire property to someone else for the entire year and are not living there yourself. It is not necessarily disqualifying, however, to rent out part of your home or rent out the entire home on a short-term basis. If one of the following applies to you, you may be eligible to claim the PRE:
Short-term Rental of All or Part of a Principal Residence
Rentschler v. Township of Melrose (Michigan Court of Appeals 2017)
David Rentschler owned property in Boyne City. In 2015, the Township of Melrose denied him a PRE for that year and the two previous years, based on evidence he was employed out of state and rented out the property for part of the year. On appeal, the MTT accepted Rentschler’s claim that the property was his principal residence but nevertheless denied the PRE based on a Treasury Department guideline that prohibited claiming the exemption on property that was rented to someone else for more than 14 days a year.
Rentschler appealed to the Michigan Court of Appeals, which concluded that the guideline was contrary to the GPTA and, therefore, invalid. The court held that if a home qualifies as a principal residence, renting it out for more than 14 days does not disqualify a homeowner from claiming the PRE.
DeForge v. Allouez Township (Michigan Court of Appeals 2022)
Keith DeForge owned a principal residence in Keweenaw County on Lake Superior and rented out three rooms of the home as an Airbnb during the summer. Allouez Township denied DeForge’s PRE. On appeal, the MTT analyzed the property as a “multiple-purpose structure” under MCL 211.7cc(16). Concluding that DeForge was using 30% of the property as an Airbnb, the MTT allowed him a 70% PRE.
The Michigan Court of Appeals reversed, pointing to both the holding in Rentschler and the language of the GPTA itself, which allows a principal residence to include “any portion of a dwelling or unit of an owner that is rented or leased to another person as a residence as long as that portion of the dwelling or unit that is rented or leased is less than 50% of the total square footage of living space in that dwelling or unit.” MCL 211.7dd (c).
The court compared short-term rentals of residential property to true multiple-purpose structures, using as an example of the latter a property owner who operates a business on the lower level of a building and lives in an apartment on the upper level. Where a property otherwise qualifies for the PRE, the court concluded, renting out a portion of it for part of the year as an Airbnb or similar use does not make it a “multiple-purpose structure” under the statute and does not disqualify the property from a 100% PRE.
Rental of Rooms in a Principal Residence
Wilson v. City of Grand Rapids (Michigan Court of Appeals 2023)
Nancy Wilson purchased a duplex in Grand Rapids in 2006. She initially received a 50% PRE based on her occupancy of one of the two units. In 2007 she converted the property into a single-family residence and received a 100% PRE from 2007 until 2020.
Wilson rented rooms in the house to various roommates over the years. In 2020, a disgruntled roommate sent the city’s code compliance department a video purporting to represent that the property was still a duplex. In response, the department asked Wilson to make a few remedial measures to the home and then cleared it as a single-family residence. After an investigation by the city’s tax assessor, however, the city notified Wilson that the residence was only eligible for a 50% PRE because it was still a two-dwelling unit.
Wilson appealed the assessment to the MTT. The tribunal accepted her argument that the property was, in fact, a single-family residence. Still, it disallowed the PRE under MCL 211.7dd(c) because Wilson was renting out 50% or more of the house’s total square footage. They based this conclusion on the fact that her roommates had full access to the house except for Wilson’s bedroom and the bedrooms of other roommates.
On appeal, the Michigan Court of Appeals disagreed with the MTT’s interpretation of MCL 211.7dd(c). The court concluded that although Wilson’s roommates had exclusive possession of their rented rooms, they had only a license—similar to a visitor’s license—to use the common areas of the residence. The court held that renting a room in one’s home to a roommate with access to common areas is not the equivalent of renting 50% or more of the residence’s square footage and does not disqualify a homeowner from the PRE.
Contact a Professional With Questions
Principal Residence Exemptions and PRE Audits can be complicated. If you have questions about your PRE eligibility or the audit or appeal process, contact Kay Kossen or any attorney in Kreis Enderle’s real estate practice group.