As the end of Summer is quickly approaching, many Michiganders will begin the process of closing up their Summer cottages as they reminisce on the great memories that were created with their loved ones that year. As an Estate Planning Attorney, many of my clients have concerns on the tax implications of transferring their real property to their heirs upon their passing. Specifically, my clients are focusing their concerns on the uncapping event that occurs when one individual transfers real property to another (i.e. from parent to child). Well the good news is that the beginning of the 2015 calendar year brought new changes to the uncapping rules- and it’s in our favor!
Pursuant to MCL 211.27a, an exemption for transfers of real property between certain related individuals without uncapping the property tax. Currently, real property’s taxable value is capped and is only allowed to increase at the lesser of five percent or the inflation rate. (MCL 211.27a(2)(a)). However, once the property is transferred to a non-exempt individual the property’s taxable value adjusts to match the State Equalized Value the following year (a.k.a. uncapping). (MCL 211.27a(3)). The new exemption to the uncapping rules provides two valuable elements: 1. The transferee must be related to the transferor “by blood or affinity to the first degree” and 2. The property must be residential property before and after the transfer.
The first element includes the following relationships: spouse, father or mother, father or mother of the spouse, and son or daughter, including adopted children and son and daughter of the spouse. At this time, sibling to sibling transfers and grandparent to grandchild are not included in this exemption as they are viewed as a second degree relationship.
The second element provides for a more expansive definition of residential property. This term is defined in MCL 211.31(c), which states:
(e) Residential real property includes the following:
(i) Platted or unplatted parcels, with or without buildings, and condominium apartments located within or outside a village or city, which are used for, or probably will be used for, residential purposes.
(ii) Parcels that are used for, or probably will be used for, recreational purposes, such as lake lots and hunting lands, located in an area used predominantly for recreational purposes.
(iii) For taxes levied after December 31, 2002, a home, cottage, or cabin on leased land, and a mobile home that would be assessable as real property under section 2a except that the land on which it is located is not assessable because the land is exempt.
In short, this definition covers not only what is normally considered to be residential, but also recreational lands and residences on leased land. It is important to note, residential property cannot be used for any commercial purpose.
While these changes are great news to the estate planning world, unexpected issues will arise. For further information regarding this article and other estate planning topics, please contact your trusted and valued attorneys at the Daudi & Kroll.