Family Cottage Owners Should Take Advantage of New Michigan Property Tax Uncapping Exemptions

The family cottage – a place where memories are made and traditions are passed down for many Michigan families. However, one of the challenges has been keeping the cottage in the family, since it has not always been financially feasible to do so. Michigan recently took a step to make cottage succession planning a little easier and less expensive.

Effective on and after December 31, 2014, intra-family real property transfers can be made without uncapping real property taxes. The new law broadens the existing law which exempts the uncapping of property taxes on certain transfers of residential real property between family members. The effect of this new law provides additional planning opportunities. Beginning December 31, 2014, if residential real property is transferred directly, from a trust or by inheritance with or without a will, it can pass to the transferor's spouse, parents, siblings, children (natural or adopted), or grandchildren without "uncapping" its value for purposes of property taxes. This is a significant development since trusts and probate estates were subject to uncapping. Parents can now maintain their residential real property during their lifetimes and transfer it to their children upon their deaths without triggering negative tax consequences on future generations.

By way of background, the annual increase in a property's taxable value while it is owned by the same person is capped, allowing for only slight increases in the taxable value. Generally speaking, whenever a "transfer of ownership" of real property occurs, the taxable value of that property "uncaps" in the year following the transfer to 50% of the property's true cash value. Michigan law, however, provides several exemptions to the definition of the term "transfer of ownership."

The new law, PA 310 of 2014, provides two important changes to the current law:

First, the definition of eligible transferee will no longer be ambiguous and will be defined as the owner's or the owner's spouse's mother, father, brother, sister, son, daughter, adopted son, adopted daughter, grandson, or granddaughter ("Related Persons"). The definition of transferor has also been expanded to include properties transferred by a trust or by inheritance under a will or intestate succession.

Second, the new law provides that the following transfers will no longer be subject to uncapping:

1. A transfer of residential property into a trust by the settlor of the trust or the settlor's spouse, provided that the sole present beneficiary or beneficiaries of the trust are all Related Persons.
2. A distribution of residential property from a trust, provided that the recipients of the property are all Related Persons.
3. A change in the sole present beneficiary of a trust that owns residential real property, so long as all of the new beneficiaries are Related Persons.
4. A distribution of residential real property under a will or by intestate succession to a Related Person.

The law also clarified the provisions concerning direct transfers of residential real property during one's lifetime. Beginning December 31, 2014, a transfer of residential real property to a Related Person is not subject to uncapping.

It is important to note that in order to take advantage of the new uncapping exemptions, residential real property cannot be used for any commercial purposes following the conveyance. It is not clear how much rental activity might trigger uncapping. The local assessor or the Michigan Department of Treasury can request verification of compliance and failure to comply with such a request within thirty days results in a fine of $200.

The new act does not exempt residential properties transferred from a limited liability company.

This new bill is important for the transfer of cottages and other family property and we would be happy to assist any family member with questions they may have.

If you have questions regarding the new transfer tax exemptions, please contact David Blau at (248) 988-1817 | dblau@clarkhill.com.