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September 11, 2014

COA limits the scope of real estate transfer tax exemption

In the consolidated case of Gardner v. Department of Treasury, Nos. 315531, 315684 and 317171, the Court of Appeals addressed the applicability of a statutory exemption to the state's real estate transfer tax.  This exemption, found at MCL 207.526u, applies where (1) the principal residence exemption was claimed under MCL 211.7cc, and (2) the state equalized value (SEV) of the property at the time of sale was equal to, or less than, the SEV at the time of purchase.  That same statutory section, however, contains an exception to this exemption stating the seller will have to pay the tax (and potentially a penalty) if "the sale or transfer of property is found by the treasurer to be at a value other than the true cash value."  The Court looked to the annual property tax assessment process and interpreted "true cash value" as two times the property's SEV.  Thus, the majority opinion concluded that whenever a property is sold for more, or less, than two times the SEV, the seller will not be entitled to the transfer tax exemption.

In making this ruling, the Court of Appeals reversed the Tax Tribunal's interpretation, which looked to MCL 211.27(1)'s definition of "true cash value" as "the usual selling price" and "the price that could be obtained for the property at private sale."  Because Treasury did not carry its burden to prove that the sales at issue were not arm's-length private sales, the Tax Tribunal held that the sellers were entitled to the exemption.

On appeal, Treasury argued that the proper interpretation of "true cash value" can be found by referring to property tax assessments.  The Court of Appeals agreed, citing MCL 211.27a(1) for the proposition that, during the property tax appraisal process, properties should be valued at 50% of their true cash value.  Thus, according to this interpretation, "true cash value" is twice the SEV determined during the property tax appraisal process.  Treasury argued that whenever a home is sold for more than twice the SEV, the transfer tax exemption does not apply.  The Court of Appeals agreed and took the analysis one step further, finding that because the statutory language indicated that the tax was due whenever a property was sold at a value "other" than true cash value, the tax will be due whenever a property is sold for more, or less, than two times the SEV.

In his dissent, Judge Owens discussed the impact of the majority's decision, noting that "the exemption would become virtually nonexistent because a property will almost never sell for exactly twice its SEV."  The dissent argued that this result could not have been intended by the Legislature, and agreed with the Tax Tribunal that the "true cash value" for purposes of this exemption should be examined through the context of an arm's-length sale.

Given the scope of this decision and this issues raised by the dissent, this case appears to be a strong candidate for leave to the Michigan Supreme Court.

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