Michigan Legislature Changes Taxable Value “Uncapping” Rules for Family Transfers

Under Michigan law, a transfer of ownership of property results in an “uncapping” of the property’s taxable value – meaning that annual increases in the property’s taxable value are not limited to the lesser of 5 percent or the inflation rate, as they otherwise would be. But certain transfers of ownership are exempt from the uncapping rules, including transfers from one spouse to another or transfers intended solely to create or terminate a tenancy by the entireties. The uncapping rules and exemptions are set forth in MCL 211.27a.

In 2012, the Michigan Legislature amended the statute to exempt transfers of property to family members related “by blood or affinity to the first degree” if the use of the residential property does not change following the transfer of ownership.  (Public Act 497 of 2012.) But the 2012 law created uncertainty about which transferees were related “by blood or affinity to the first degree,” leaving the State Tax Commission (“STC”) to interpret the language. In a 2013 bulletin, the STC concluded that the new exemption did not apply to trusts, LLCs, or probate distributions. (Bulletin 23 of 2013.)

Now, the Legislature has again amended the statute to clarify its intent and impact. Public Act 310 of 2014 provides that, after December 31, 2014, a residential parcel’s taxable value will not be uncapped if it is transferred to the transferor’s or the transferor’s spouse’s “mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter,” and if the use of that residential real property does not change. This eliminates the confusion about who is related “by blood or affinity to the first degree.”

Additionally, after December 31, 2014, the following transfers of residential property will not result in an uncapping if the beneficiary or distributee (as applicable) is the settlor’s “mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter,” and if the use of that residential real property does not change:

• A conveyance to a trust.
• A conveyance by distribution from a trust.
• A change in the sole present beneficiary or beneficiaries of a trust.
• A conveyance by distribution under a will or by intestate succession.

The new law also establishes additional reporting requirements. The beneficiaries must provide proof to the Department of Treasury or the assessor that they meet the above requirements within 30 days of the transfer, or else they may face a $200 fine.

Because the uncapping rules and exemptions have been the subject of new legislation as well as numerous State Tax Commission bulletins and judicial decisions, assessors should consult with legal counsel before determining whether and when to uncap a parcel’s taxable value.

• Read full October 2014 Municipal Law News