Published on March 5, 2014
Fourth Annual Property Tax Seminar Thursday, February 20th, 2014
Tax 101 Update By: Karrie A. Zeits firstname.lastname@example.org | (231) 486-4521
Assessment Notice • Assessment Notices are usually delivered at the end of February. • The Assessment Notice indicates what the local assessor determines a property is worth for the current year and the taxable value of the property. It does not indicate what a property’s taxes will be for the applicable year. • Assessed values may change from year to year. The taxable value can only be changed based on the statutory formula. Typically, the gap between the “assessed value” and the “taxable value” will grow each year.
Classification Codes Real Property Type Residential Agriculture Commercial Industrial Developmental Timber Cut-Over Classification Code 400’s 100’s 200’s 300’s 600’s 500’s If the total usage of a parcel includes more than 1 classification, the assessor will determine the classification that most significantly influences the total valuation of the parcel.
Atypical Classifications Developmental real property Includes parcels: • < 5 acres without buildings, or • < 15 acres with a market value in excess of its value in use. • May include farmland or open space land adjacent to a population center, or farmland that may be subject to competing valuation influences. Timber-cutover real property Includes: • Parcels that are stocked with forest products of merchantable type and size; • Cutover forestland with little or no merchantable products; and • Marsh lands or other barren land.
Different Valuations • Taxable Value (TV) • Capped Value (CV) • True Cash Value (TCV) • Assessed Value (AV) • State Equalized Value (SEV)
Taxable Value • The most important component of your assessment notice. • Created by Proposal A in 1994. • What is it? – Lesser of • State Equalized Value, or • Capped Value – Statutory formula meant to keep property taxes at an affordable level for long term homeowners • Why is it important? – TV x Millage = Tax Bill – Millage = Tax Dollars per $1000 of TV
Capped Value • How is it calculated (2012)? – 2014 TV = [(2013 TV – LOSSES) X (IRM)] + ADDITIONS – IRM = Inflation Rate Multiplier = lesser of • 1.05 or • the IRM calculated per the statute – 2014 = 1.016
True Cash Value • What is it? – Fair Market Value (FMV) – what a willing buyer would pay a willing Seller. • How is it determined? – By the Assessor – By an Appraiser • Why is it important? – One half of this value determines Assessed Value (AV)
Assessed Value • What is it? – One half of the property’s “true cash value” (FMV) as determined by the assessor. • How is it calculated? – AV = True Cash Value / 2 • Why is it important? – Component of SEV and indication of potential sales price.
State Equalized Value • What is it? – SEV = AV x the Tentative Equalization Factor or the factor applied by the State Equalization Department. – SEV represents 50% of the “True Cash Value” of a property. It is called an equalized value because the assessor has prepared the value based on sales within the city, the county equalization board has made certain that each city and township have assessed the properties at an equal level, and the Michigan State Tax Commission has studied and equalized all the counties within the state to ensure equity between them. • Why is it important? – It is the TV the property “uncaps” to the year following a transfer.
Tentative Equalization Factor • What is it? – The factor determined by the county equalization director or the State Equalization Department to be applied to a class of property within a taxing jurisdiction to ensure the AV of all property within the class does not exceed 50% of its True Cash Value as required by the Michigan Constitution. • How is it calculated? – By the county or state equalization departments. • Why is it important? – May adjust the “uncapped” taxable value of the property and impacts an Assessor and the Board of Review’s ability to adjust AV and SEV.
Transfer • What is it? – Notice that the Taxing Jurisdictions has determined that a transfer of the property has occurred. • Why is it important? – It causes the property’s TV to be “uncapped” to the SEV.
Appealing Your Assessment Notice 1. Assessor 2. Board of Review a. March b. July c. December 3. Michigan Tax Tribunal **Calendar of Important Dates
Other Information • Principal Residence Exemption • Qualified Agricultural Property Exemption • Qualified Forest Property Exemption • Poverty Exemption • Other Exemptions
Assessor & Board of Review • Record Cards – Assessor’s Manual – True Cash Value of property – Adjusted by ECF • Equalization Factor • Appraisals
Principal Residence Exemption Test: Owned and Occupied. “1 place where an owner of the property has his or her true, fixed, and permanent home to which, whenever absent, he or she intends to return.”
May Not Claim If • Has claimed a substantially similar exemption in another state for the year in question. • Spouse owns property in another state and has claimed the exemption, unless separate tax returns are filed. • Filed a nonresident Michigan income tax return. • Filed an income tax return in another state as a resident. • Previously rescinded the PRE and claimed an exemption for another property for that year.
How to Claim: • File a PRE Affidavit. • By June 1, for the summer tax levy. • By November 1, for the winter tax levy.
Removing the Exemption • Claimant’s Request to Rescind – Must be filed within 90 days from the date the property no longer qualifies as the PR. • Assessor’s Denial. – Current year plus up to 3 prior years. – Appeal to MTT within 35 days. • Michigan Department of Treasury denial. – Current year plus up to 3 prior years. – Initial Appeal to Department.
Personal Property Tax By: Karrie A. Zeits email@example.com | (231) 486-4521
What is a Personal Property Tax? Includes tangible assets like: • Furniture • Computers • Copiers • Machinery and equipment
Who Pays? • The owner of the personal property, if known, or the person in possession of the personal property. • Trade Fixtures are assessed to the Tenant. • Leasehold Improvements may be assessed by the assessor to either the Tenant as a personal property assessment or to the Landlord as part of the real property assessment.
How does the Assessor know that I have Personal Property within the Jurisdiction? • Driving around • DBA filings • State of Michigan business filings • Prior year(s) reporting • Personal Property Statement • Personal Property Tax Audits
Industrial and Commercial Personal Property Exemption • Industrial personal property is exempt from the 6 mill state education tax and is also exempt from up to 18 mills levied for school operating purposes. • Commercial personal property is exempt from up to 12 of the mills levied for school operating purposes.
Personal Property Phase Out • August Election. • Qualified New Personal Property - manufacturing property purchased on or after December 31, 2013, will be exempt from property taxes beginning December 31, 2015. • Qualified Previously Existing Personal Property – manufacturing property that has been subject to or exempt from the collection of taxes for the immediately preceding 10 years beginning December 31, 2015 through 2022. Beginning 2022, all manufacturing property will be exempt. • Under $80,000 Exemption.
Claiming the Exemptions Affidavits will need to be filed with the local assessor as follows: • New Manufacturing Property: Beginning February 20, 2016. • Existing Manufacturing Property: Beginning February 20, 2016.
Under $80,000 Exemption • Eligible Property: – Industrial or commercial personal property. – Owned, leased, or in possession in taxing jurisdiction. – TCV less than $80,000. – Not leased to or used by a person who previously owned the property or a related entity. • Claiming the Exemption: – Must be claimed by February 10, 2014 (?). – Affidavit.
Appealing the Personal Property Assessment • Assessor • March Board of Review • Michigan Tax Tribunal
Exempt Property (Nonprofits) By: Karrie A. Zeits and Scott D. Harvey firstname.lastname@example.org | (231) 486-4521 email@example.com | (231) 486-4545
Nonprofit Organizations • Created under state law (Michigan Nonprofit Corporation Act). • Apply for income tax exemption under federal law. • Several categories of tax exemptions. – 501(c)(3) “charitable” tax exemption. – IRS Form 1023. – Does NOT automatically ensure property tax exemption under state law. * An entity does not qualify for a tax exemption merely because it is incorporated under the Michigan Nonprofit Corporation Act.
Requirements • Property must be owned and occupied by the entity claiming the exemption. • The entity must be a nonprofit. • The entity must be one of the listed nonprofits. • The property must be occupied by the nonprofit solely for the purposes for which it was incorporated.
• Occupy = physical presence. Use is not enough. • Listed nonprofits = library, benevolent, charitable, education, scientific, theatre, hospital etc. • Solely for the purpose = partial exemption (?).
Charitable and Educational • Charitable = whether organizations’ activities, taken as a whole, constitute charitable gift for benefit of general public. • Educational = significantly relieves the government’s educational burden.
Audit of Exempt Properties • Centre Ice. • Others.
Appealing the Determination • Board of Review. • Michigan Tax Tribunal within 35 days. • Court of Appeals.
Dates to Remember • • • • • • • • • • February 10, 2014 Deadline for submitting under $80,000 Affidavit. February 20, 2014 Deadline to file Personal Property Tax statement with the Assessor. March 10, 11, or 12, 2014 March Board of Review. June 1, 2014 Deadline to file PRE Affidavit for summer tax levy. June 2, 2014 (May 31 is a Saturday) Deadline to appeal commercial, industrial, and utility personal property assessment to the MTT. June 30, 2014 Deadline for classification appeal to the State Tax Commission. (Must have appealed to the BOR.) July 22, 2014 July Board of Review. July 31, 2014 Deadline to file appeal of agricultural personal property assessment to the MTT. (Must have appealed to the BOR.) November 1, 2014 Deadline to file PRE Affidavit for winter tax levy. December 9, 2014 December Board of Review
Recent Developments in Real Property Taxation - 2013 By: Robert W. Parker firstname.lastname@example.org | (231) 486-4504 "It would be so nice if something made sense for a change.” - Alice from Lewis Carol's Alice in Wonderland
State Tax Commission 2013 Annual Report
State Tax Commission Bulletin 23 of 2013 [December 16, 2013] Clarifies that the exemption created by PA 497 of 2012 transfer of residential real property to a person related to the transfee by blood or affinity to the 1st degree, does not apply to transfers to a trust, an llc or distribution from probate.
State Tax Commission Transfer of Ownership Guidelines issued December 2013 • Clarified that in order to qualify for the PA 497 exemption there must be no change in use. Does not matter that the classification stays the same. • Clarified that a lady bird deed where the remainder interest is created in a party who would qualify under PA 497, MCL 211.27a(7)(s) is not a transfer.
Drew v Cass County 830 NW2d 832; 299 Mich App 495 (2013) • Driver’s licences, voter registration + tax returns does not = PRE.
Power v Department of Treasury 835 NW2d 622; 301 Mich App 226 (2013) • Lot lease does not = PRE.
Mancuso Family Trust v City of Charlevoix 831 NW2d 907; 300 Mich App 1 (2013) • Identical trustee does not = commonly controlled entity.
Detroit Lions, Inc v City of Dearborn 302 Mich App 676; 840 NW3d 168 (2013) • “Commonly controlled” means just that. Commonly controlled.
Real Estate Tax Issues for Seniors and Veterans By: Gregory R. Kish email@example.com | (231) 486-4557
Real Estate Tax Issues Impacting Seniors • Disabled Veterans Exemption • Poverty Exemption • Snowbirds and the PRE • PRE for Nursing Home and Assisted Living residents • Payment Deferral for age 62 and over
Dannie Lee Barnes Disabled Veteran Property Tax Relief Act (formerly known as the “Soldiers and Sailors Exemption”) Soldiers and Sailors exemption (in the past): • Provided a complete exemption from real estate tax for any soldier or sailor honorably discharged with a serviceconnected disability for which the veteran received a 702 housing grant from the US Department of Veterans Affairs (VA) for adaptive housing. • Exemption would continue for the veteran even if the veteran moved to a home other than the adapted home. • Exemption would continue for the un-remarried surviving spouse of the veteran who lives in the adapted home.
Who was Dannie Lee Barnes? • Disabled veteran living in an assisted living facility in 2003. • Approved for specially adaptive housing grant by the VA. • Funds were released to an escrow account, to be released to the contractor as work progressed. • On March 30, 2004, work was scheduled to commence. Mr. Barnes died that day. • Cascade Township denied Mrs. Barnes’ application for the Soldiers and Sailors Exemption. The decision was affirmed by the Michigan Tax Tribunal because Mr. Barnes did not actually “receive” the 702 housing grant and the home was not “specially adapted housing” because the work had not been done.
Exemption Expanded to Include: • All of those to whom the old Soldiers and Sailors exemption applied (with no requirement of residence in the adapted housing). • All veterans who receive disability compensation (serviceconnected disabilities) from the VA at a 100% rating. • All veterans rated as “individually unemployable” by the VA (rated at less than 100% service-connected disabilities but receiving compensation at 100% because of inability to work). • All un-remarried surviving spouses of veterans listed above.
Fiscal Analysis • House Fiscal Agency Analysis from June, 2013 – “To the extent that the expanded exemption is claimed, revenue from the State Education Tax (which is earmarked to the School Aid Fund) and local property tax would decline. However, without knowing the number of veterans that would qualify and the corresponding taxable values of their homesteads, an accurate fiscal impact cannot be determined.” • Senate Fiscal Agency Analysis from November, 2013 (paraphrased) – We don’t know how many disabled veterans are rated as IU, nor do we know how many own homes. About 8,000 Michigan veterans receive disability compensation with a 100% rating, and if all of them were approved, we think it would cost about $11.5 million per year, of which $9.4 million would come from local unit revenue. The report did not address claims by spouses.
Disabled Veterans Exemption (continued) • Signed by Governor on November 12, 2013, retroactive for 2013 taxes. • Applicants should contact the local assessor to file the required affidavit and supporting documents from the VA. Local application processes vary. • July 2014 Board of Review can grant the 2013 exemption to any applicant who missed the 2013 December Board of Review deadline but otherwise met the exemption’s requirements.
Poverty Exemption • An exemption from payment of real property taxes may be granted from 0% to 100% for eligible property owners. MCL 211.7u • Must be an owner and occupy the property as a principal residence.* • Must file a claim with the supervisor or board of review after January 1 but before last day of Board of Review. • Must provide copies of tax returns and other supporting documents. * “Principal residence” means principal residence or qualified agricultural property.
Poverty Exemption…Continued • Local taxing units establish publically available guidelines for granting the exemptions, included but not limited to the income and assets of the claimant and the household. • Policy must be followed unless there are “substantial and compelling reasons” to deviate that are explained in writing to the claimant. • Income test may not be stricter than federal Health and Human Services Poverty Guidelines. (Family of four = $23,850 for 2014) • Homestead tax credit and food stamps are excluded.
Poverty Exemption…Continued • Asset test varies by taxing unit but must focus on resources available to pay taxes and must not include the value of the principal residence. • A policy of denying the poverty exemption if the value of the property is higher than the average value of residential properties in the taxing unit is common but may be challenged. • Policies of requiring property ownership for a certain number of years prior to applying for the exemption or limiting the number of consecutive years for which a person may receive the exemption have been struck down by the Michigan Tax Tribunal but still can be found in some municipalities’ guidelines.
Poverty Exemption…Continued • Applicants may appeal adverse decisions to the Michigan Tax Tribunal. • March Board of Review by July 31 • July and December Boards of Review within 30 days of the denial.
Snowbirds and the PRE “The law” says: "Principal residence" means the 1 place where an owner of the property has his or her true, fixed, and permanent home to which, whenever absent, he or she intends to return and that shall continue as a principal residence until another principal residence is established. . . principal residence also includes any portion of a dwelling or unit of an owner that is rented or leased to another person as a residence as long as that portion of the dwelling or unit that is rented or leased is less than 50% of the total square footage of living space in that dwelling or unit.” MCL 211.7dd(c) Guidelines from the State Tax Commission specify that spending the winter in another state does not impact the PRE. Audited for Voting, State Income Tax Filing, and Driver Licensing, BUT these audit tests do not substitute for “the law.”
Snowbirds and the PRE…Continued • Renting a garage apartment or similar rental unit will result in a pro rata reduction of the PRE. • Renting a room to a boarder does not decrease the PRE unless the boarder is renting more than 50% of the home, in which case there is a pro rata reduction. • Rental of the primary house for part of the year does not result in a pro rata reduction in the PRE based upon the portion of the year the rental occurs. • Instead, renting the house for 15 days or more during a calendar year results in complete loss of the PRE according to STC guidelines.* • PRE will be in danger if the homeowner owns a home in another state and enjoys a tax benefit from that state similar to the Michigan PRE. *STC guidelines are not “the law” but are used by assessors in making determinations.
PRE for Nursing Home and Assisted Living Residents The definition of “principal residence” for the PRE involves a person’s intent to return home when away. MCL 211.7cc(5) Excerpt: A person who previously occupied property as his or her principal residence but now resides in a nursing home or assisted living facility may retain an exemption on that property if the owner manifests an intent to return to that property by satisfying all of the following conditions: • The owner continues to own that property while residing in the nursing home or assisted living facility. • The owner has not established a new principal residence. • The owner maintains or provides for the maintenance of that property while residing in the nursing home or assisted living facility. • The property is not occupied, is not for sale, is not leased, and is not used for any business or commercial purpose. Neither “nursing home” nor “assisted living” are defined by the General Property Tax Act.
Payment Deferral for Age 62 and Over • Seniors age 62 or over, the un-remarried surviving spouse of someone who was 62 or older, parapalegic, quadriplegic, hemiplegic, eligible servicepersons, eligible veterans, eligible widow or widower, or a person who is totally and permanently disabled or blind. • Must have income in the prior tax year less than $40,000 (not indexed). • May delay payment of Winter taxes to April 30 of the first year of delinquency and may delay summer taxes until the following February 15. • Allows taxpayers to apply for and receive the homestead property tax rebate before the taxes are due. • Apply through county treasurer.
Planning Opportunities and Pitfalls By: Timothy M. White firstname.lastname@example.org | (231) 486-4512
Estate/Business Planning and Property Taxes • Must be one consideration among many. • Should not (normally) be the primary consideration. • Ways to avoid “uncapping”. • Other issues related to “uncapping”. • Other considerations.
Ways to Transfer Property But Avoid “Uncapping” • Joint Tenancy with full rights of survivorship. • Public Act 497 of 2012 - “First Degree Transfers”. • Other Considerations.
Advantages & Disadvantages to Joint Tenancy • Advantages • Avoids uncapping • Avoids probate • Can be implemented with little cost • Disadvantages – – – – Debtor/creditor issues Other obligations: Taxes, Maintenance, Liability & Insurance Family issues Loss of control • Other Considerations • Joint Contract among the joint tenants may mitigate but not completely resolve these disadvantages. • Federal Income and Estate Tax Issues. • Does it make sense in the context of the overall plan?
More Than Just a Deed Joint Tenancy Agreements should address: • Responsibility for taxes, repairs, upkeep. • “Buyout” provisions & Succession. • Ongoing joint ownership/management. • Transfer restrictions. • Trigger provisions for debtor/creditor issues.
Public Act of 497 2012 “First Degree Transfers” MCL 211.27a(7)(s) Beginning December 31, 2013, a transfer of residential real property if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer. • STC Guidelines: • “Blood or affinity of the first degree” includes: spouse, parents, stepparents, spouse’s parents, children (including adopted and stepchildren), and siblings. • Does not apply to transfers from Probate, Trust, or LLC, but will apply if transferor retains a life estate. • Same Use, “there are numerous changes that could be considered a change in use and a change in use is not limited to a change in property classification.”
“First Degree Transfers” Examples • Mother transfers vacation home in June 2014, to Daughter who continue to use it as a vacation home. No transfer of ownership, because parties are related by blood or affinity to the first degree. • What if Mother had previously (2011) transferred property, but retained a life estate? • Mother and Father transfers primary residence to Son, retaining a life estate. Both parents die in 2014. No transfer of ownership if use does not change. Does Son have to use the property as a primary residence? • What if Son wants to use it as a vacation rental? What if only rented for a few weeks a year?
Advantages & Disadvantages to Retained Life Estates • Advantages • Avoids uncapping – provided transferee is related by blood or affinity to the first degree and use remains the same. • Avoids probate. • Can be implemented with little cost. • Disadvantages • • • • Continued Uncertainty – Particularly regarding “use”. Creditor Issues (no LLC or Trust protections). Family issues (Sharing among members of later generation). Pending legislative proposals. • Other Considerations • Federal Income and Estate Tax Issues. • Does it make sense in the context of the overall plan?
Other Issues Related to Uncapping Entities • Transfer Between Entities. – Not a transfer of ownership if made between entities under “common control”. • Michigan RAB 1989-48 (parent/subsidiary, brother/sister, combination). • Trade or business.
Other Issues Related to Uncapping…Continued Entities, cont. • Transfer into an Entity – “Mirror-Image” Rule: Not a transfer of ownership if same owners in same percentages (also would apply to transfers between entities). • Lakewood Decision • Follow the letter of the rule! – Example: A and B own vacation property as joint tenants (or as tenants in common); A and B convey property to XYZ, LLC, and A and B jointly own 100% of the membership interest in the XYZ (or 50% each if the property is owned as tenants in common). – Uncapping Within the Entity: Transfer of >50% interest.
Other Issues Related to Uncapping…Continued Miscellaneous • Trusts & the “Sole Present Beneficiary” Requirement: Grantor or Grantor’s spouse. – “Spray Provisions”: Make sure that these contain language that real property is held solely for the benefit of the Grantor’s spouse. • Partial Uncapping. – Transfer of tenant in common interest. • Unrecorded Deed. – Still a transfer!
Cost/Benefit Considerations Some common considerations in any analysis: • Tax savings • Estate and gift tax implications • Debtor/creditor issues • Family issues • Other estate planning goals and objectives • Government benefits/Medicaid • Plans of heirs/beneficiaries for the property
Principal Residence (PRE) Considerations • Must be “owned” and “occupied”. • “Owned” – Any % of ownership (e.g., 1%) can qualify for PRE. – Cannot qualify if owned by an entity (e.g., LLC). – Trusts are generally ok (as long as the person claiming the PRE is one of the trust’s beneficiaries). • “Occupied” – – – – – Principal residence. Resident of MI. Haven’t filed a non-resident MI tax return. Haven’t filed a tax return as a resident of another state. You (or your spouse) don’t claim an exemption in another state (unless you don’t file joint tax returns, in which case you may be able to claim PRE in both states).
Questions? Thank you for attending! © 2014 Smith Haughey Rice & Roegge. All rights reserved.
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