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Taxation-New Uncapping Rules--UPDATE

On December 31 of 2013, MCL 211.27a(7)(s) took effect.  The purpose of the new law was to permit the inter-family transfer of residential property while preserving the current "cap" on the taxable value of the family property .  The Act envisioned that cottages, vacations homes, residences, recreational property all could be transferred within the family without the effect of having that property "uncapped" resulting in higher property taxes.

To be eligible under the new rules, the property transferred must be "residential" property both before and after the transfer.  Also the transfer must be to a transferee who is related by blood or affinity to the first degree.  State Tax Commission bulletin 5 of 2013 defines affinity to the first degree as including the following relationships: spouse, father or mother, father or mother of the spouse, son or daughter, including adopted children and son or daughter of the spouse.

Significantly, under that bulletin grandchildren are not included nor is a trust or the estate of a decedent.  Since many folks simply do not plan ahead, their property is often transferred from their estates.  That will "uncap" the taxable value despite the fact that the transfer is to a family member otherwise related in the first degree.  Similarly, many people have transferred their cottages, residences, etc. to their revocable trust. Again, under the law, a transfer from a revocable trust to a child would result in an uncapping of the taxable value. 

Where the legislative purpose was to permit inter-family transfers without the effect of uncapping the taxable value for property tax purposes, these omissions are glaring and likely unintended.  Look for the legislature to act on amending legislation to remedy these apparent oversights.  In the meantime, check with your attorney/estate planner BEFORE you transfer residential property to protect insofar as possible your existing property tax values.

UPDATE--The State Tax Commission issued some clarification in Bulletin 23 of 2013, issued Dec. 16 of 2013.  "A first degree blood relative is a person who shares approximately 50% of their genes with another member of the family.  These relatives include parents, children or siblings.  Simply put, a transfer of residential real property is not a transfer of ownership if the tranferee has one of the following relationships to the transferor and the use of the property does not change:

  1. Spouse
  2. Father or Mother
  3. Father or Mother of the Spouse
  4. Son or daughter
  5. Adopted son or daughter
  6. Son or daughter of the spouse
  7. Siblings
Due to the blood relationship clause, the Commission has defined transferee and transferor as a person.  Therefore, this exemption does not apply to a trust, a limited liability company or a distribution from probate"

The above statement is a supplemental bulletin to Bulletin 5 of 2013.  Again, we anticipate further action by the legislature and will keep the updates going.