Recently Governor Snyder signed Public Act 310 of 2014, which expanded the available exemptions from property tax “uncapping” in Michigan. Beginning December 31, 2014, certain transfers to and from trusts, from probate estates, and within families will not be considered a transfer of ownership, and therefore will not trigger an uncapping of the property’s taxable value.
The new law provides critical new definitions and clarity to the exemptions to protect transfers to a defined group of family members. The group of family members that are considered a Related Person now consists of:
- Spouses
- Parents (including parents of a spouse)
- Siblings (including siblings of a spouse)
- Children (including adopted children and children of a spouse)
- Grandchildren (including grandchildren of a spouse)
The new law provides that the following transfers will no longer be subject to uncapping:
- A transfer of ownership of residential property into a trust by the settlor of the trust or the settlor’s spouse, provided that the sole present beneficiary or beneficiaries of the trust are all Related Persons.
- A distribution of residential real property from a trust, provided that the recipients of the property are all Related Persons.
- A change in the sole present beneficiary of a trust that owns residential real property, so long as all of the new beneficiaries are Related Persons.
- A distribution of residential real property under a Will or by intestate succession to a Related Person.
What is a transfer of ownership?
Central to the concept of transfer of ownership is a change in the beneficial use of the property. Michigan statute defines “transfer of ownership” generally as the conveyance of title to or a present interest in property, including the beneficial use of the property, the value of which is substantially equal to the value of the fee interest. Michigan Compiled Law 211.27a(6) (a-j) provides a variety of examples of what constitutes a transfer of ownership for taxable value uncapping purposes. If a transfer of property (or ownership interest) meets one of these definitions and does not fall under one of the exceptions or exemptions noted in the law, that transfer is a transfer of ownership. Transfer of ownership definitions and transfer of ownership exceptions are contained within the statute.
Is a conveyance of a property by deed a transfer of ownership?
Yes, a transfer of property by deed is a transfer of ownership.
Why is a transfer of ownership significant with regard to property taxes?
In accordance with the Michigan Constitution as amended by Michigan statutes, a transfer of ownership causes the taxable value of the transferred property to be uncapped in the calendar year following the year of the transfer of ownership.
What is meant by “taxable value”?
Taxable value is the value used to calculate the property taxes for a property. In general, the taxable value multiplied by the appropriate millage rate yields the property taxes for a property.
What is meant by “taxable value uncapping”?
Except for additions and losses to a property, annual increases in the property’s taxable value are limited to 1.05 or the inflation rate, whichever is less. In the year following a statutory transfer of ownership, that limitation is eliminated and the property’s taxable value is set at 50% of the property’s true cash value (i.e., the state equalized value). This is what is meant by “taxable value uncapping”.
Generally speaking, whenever a “transfer of ownership” of real property occurs, the taxable value of that property “uncaps” in the year following the transfer to 50% of the property’s true cash value. Michigan law, however, provides several exemptions to the definition of the term “transfer of ownership.” Until now, some transfers into trusts were subject to uncapping and all transfers from trusts and probate estates were subject to uncapping.
Is a conveyance of property to a trust a transfer of ownership?
Yes, pursuant to MCL 211.27a(6)(c), a conveyance to a trust after December 31, 1994 is a transfer of ownership. However, if the grantor stated on the deed is the settlor (creator) of the trust or the settlor’s spouse or both and the sole present beneficiary of the trust is the settlor of the trust or the settlor’s spouse or both, the conveyance is not a transfer of ownership.
Beginning with conveyances on or after December 31, 2014, if the settlor or the settlor’s spouse, or both, conveys residential real property to the trust and the sole present beneficiary or beneficiaries are the settlor’s or settlor’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance, the conveyance is not a transfer of ownership.
Is a conveyance of a deceased person’s property as directed by a Will or as directed by a court (when there is no will) a transfer of ownership?
Yes. Subject to any probate administration that may occur if real property assets are needed to satisfy debts of the decedent’s estate, title to a decedent’s real property generally passes at the time of his or her death to any devisees or heirs.
However, the conveyance is not a transfer of ownership if the person receiving the property is the deceased person’s spouse; or beginning December 31, 2014, for residential real property, if the recipient is the decedent’s or the decedent’s spouse’s mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter and the residential real property is not used for any commercial purpose following the conveyance.