April 17 has passed. Corporate and income taxes have been paid, refunds have been spent, and you’re in the clear — right?
When it comes to real estate taxes, tax day can be every day. Property taxes can be a large expense of real property ownership. On the positive side, property taxes support good schools and community services. Yet, they come directly out of property owners’ pockets and can result in a major—and sometimes unanticipated—expense.
Many people have no idea how their property taxes are calculated or how they are assessed. Understanding these taxes can save you time and money. There are two areas of real estate taxation business owners and individuals should consider: Assessing taxable value and the uncapping of taxable value.
Assessing taxable value
When it comes to determining taxable value of real property, Tax Day is actually Dec. 31. That’s when the reassessment of the value of your property is finalized, which is what determines your next year's property taxes. The local assessor annually establishes the property's State Equalized Value at half the true cash value of the property.
If there was no transfer of ownership in the prior year, the assessor will calculate the property’s assessed taxable value by taking the taxable value of the property for the prior year, reducing the value by any losses (removing the greenhouse, for example) and multiplying that amount by the inflation rate, and increasing it by the market value of any additions (the new bathroom). Michigan law limits the amount by which the taxable value of your property may be increased yearly to the lesser of 5 percent or the increase in the "general price level" for the prior tax year.
Regardless of the inflation rate, the annual multiplier cannot be more than 1.05. In late January or February of each year, you will receive a notice in the mail stamped "THIS IS NOT A TAX BILL" indicating the tentative SEV and taxable value figures for the property.
This year, many property owners were left scratching their heads. The SEV went up last year by 3.7 percent—the largest increase in several years—but sales prices of real property were generally flat.
If the valuation of your property seems excessively low, do a small dance and keep quiet. If the value, whether the SEV or the taxable value, seems too high, however, you may challenge either. The notice provides a deadline by which you must appeal to the local board of review if you feel the value is incorrect. It is not unusual for the SEV to creep up over the years to a value substantially greater than the taxable value, with significant consequences if there is an uncapping transfer described below.
You should, therefore, pay close attention to the appreciating SEV and consider appealing its determination if it appears excessive, even if the annual increase in taxable value appears manageable due to the effect of the cap. A few things to remember if you plan to challenge the assessed value:
Do your research and state your case with numbers.
In appealing the valuation set by the assessor, an independent appraisal is the best evidence that the valuation is incorrect. This can be accomplished by obtaining an appraisal, which can cost between $500-1,000, but could save you several thousand dollars per year in taxes.
Start planning early. Review boards are required by Michigan law to meet in March. Assessment notices are only required to be mailed at least 10 days before the meeting, meaning you may only have a few days to prepare for the review.
Uncapping: When the limits come off
In a year when the sale of property is involved, all bets are off. When ownership of a parcel of property is transferred, the property’s taxable value is "uncapped" or reassessed on the tax rolls at the SEV, which is 50 percent of the current true cash value. For a property that has not had a change in ownership in many years, uncapping may lead to a significant increase in property taxes.
Two of the most frequent concerns raised by taxpayers involve the unfairness of the disproportionate tax burden on the uncapped properties and the potential for an increasing tax burden on properties that are declining in value. Business property owners—and, by extension, tenants—have seen uncapped property valuations and taxes go through the roof with the recent boom in real estate prices.
If you are considering a move in the next few years and you have owned your business or lived in your home for a long time, you should closely review your assessment. Even though your taxes are capped, they will become uncapped for the next purchaser. If your SEV is above 50 percent of market value, this could impact the resale of your building because the new buyer will be paying more taxes based on your current SEV.
Keeping track of the value of your real estate portfolio—whether it’s a single home or multiple commercial buildings — can eliminate surprises come tax time. And planning for those surprises by keeping independent appraisals up to date can actually serve you well during the assessment review process.
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Michael H. Schubert and Kari E. Berge are attorneys with Warner Norcross & Judd LLP. Both practice in the Firm's Muskegon office and are members of the Real Estate Services Group, which provides comprehensive services in all aspects of commercial real estate from acquisitions to zoning.