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Dec 2014
09
December 09, 2014

Changes to Michigan property laws could affect cottage owners


Thinking about passing the family cottage down to the next generation?  Changes to Michigan property tax laws that go into effect on New Year's Eve could put some property owners at a disadvantage if they don't think through some key questions, according to Todd Simpson, a partner at Warner Norcross & Judd LLP.

Michigan law includes a cap on the annual increase in property taxes.  The value used for determining property taxes can increase by no more than the rate of inflation – or 5 percent if lower – even if the actual increase in value was greater.  As a result, those who have held their property for a long period of time are likely paying tax as if the property was worth much less than its true value.  That cap comes off, though, when there is a transfer of ownership and the taxable value jumps to the fair market value, which is then capped at that level for the new owner.

The main place where this comes into play is with a cottage or other heirloom property that is intended to stay in a family generation after generation.  When a property is uncapped, the younger family members may find themselves facing an unpleasant tax surprise or, even worse – find themselves needing to sell the property.

Last year, Michigan enacted new legislation to add an exemption from uncapping for transfers of residential real property to people who were related “by blood or affinity to the first degree” to cover transfers to parents, step-parents, siblings, children, step-children and parents of a spouse.  The exemption, however, only applied if the use of the property did not change after the transfer and the state interpreted it to only apply to transfers made by a living person – not transfers resulting from the prior owner’s death.

This fall, the Michigan Legislature decided to replace the Buzz Lightyear-like "blood or affinity to the first degree" language with a broader and easier-to-understand set of exemptions based on family relationship.  The new exemption will go into effect and replace the old one on Dec. 31 and will exempt transfers to parents, siblings, children and grandchildren.  The inclusion of an exemption for transfers to grandchildren is new.  The new exemption will also cover transfers that take place at death and transfers that are made through a trust in a way that is much more taxpayer-friendly than the current exemption.   

Although this change generally provides more flexibility for keeping property taxes capped, there are a couple of specific situations where the change will have a potentially adverse effect:
  • First, the new exemption may not cover transfers to step-relatives as fully as the current exemption does.
  • Second, and perhaps more importantly, the new exemption has a stricter test relating to the commercial use of the property after the transfer and may prevent owners from using their cottages as vacation rentals.
For more information on these changes, contact Simpson at either tsimpson@wnj.com or 616.752.2543.

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