By: Lance T. Denha, Esq.
Michiganders have always had an affinity to pursue investments in Florida. Over the last few years we have seen a rise in both assessments of property for taxable value and assessments which have increased property taxes. Each state has its own set of rules on what is a transfer of property and his it will be treated. This is especially true when the initial purchase was purchased in the individual name as opposed to within an entity, such as a corporation or limited liability company (LLC). This article is limited to non-homestead or investment properties as there is a separate set of rules associated with what would be considered Homestead or primary residences.
The legalities via statutory law associated with the transfer of property to entities which are under “common control” may pass the test as common ownership in Michigan and do not result in a significant hike or “uncapping of property” which would increase tax exposure in subsequent years, whereas the same scenario may yield a different result in Florida.
A transfer of ownership causes the taxable value of the transferred property to be uncapped in the calendar year following the year of the transfer of ownership. Such transfers may include:
• Execution of a Lease, Transfer by Deed, Sale By Land Contract, Transfer of Property between former spouses, Transfer to separate and distinct legal entity.
What is meant by “taxable value”? Taxable value is the value used to calculate the property taxes for a property. In general, the taxable value multiplied by the appropriate millage rate yields the property taxes for a property.
What is meant by “taxable value uncapping” in Michigan? In the year following a statutory transfer of ownership, that limitation is eliminated and the property’s taxable value is set at 50% of the property’s true cash value (i.e., the state equalized value). This is what is meant by “taxable value uncapping”.
By statute, an assessor must uncap a property’s taxable value in the year following the transfer of ownership of that property. The assessor shall set the property’s taxable value for the calendar year following the year of the transfer of ownership as the property’s state equalized valuation for the calendar year following the transfer.
Michigan statute defines “transfer of ownership” generally as the conveyance of title to or a present interest in property, including the beneficial use of the property, the value of which is substantially equal to the value of the fee interest. If a transfer of property (or ownership interest) meets one of these definitions and does not fall under one of the exceptions or exemptions noted in the law, that transfer is a transfer of ownership.
The determination of whether a “conveyance at issue” is a transfer of ownership that uncaps the taxable value of the property must be separately determined after identification of the “conveyance at issue.”
Under Florida law if there was a transfer of non-homestead property to an entity greater than 50 percent from an individual, that would result in change of ownership and “uncapping of the property”. Only non-homestead exemptions for these types of transfers are: 1) when transfer is between husband and wife, 2) transfer is done to correct an error, or 3) transfer is between legal and equitable title.
An example of a difference between Michigan and Florida laws in this regard, is a situation where an individual chooses to transfer property to an entity (i.e. LLC or Corporation) of which he remains in control, under Florida law that would be considered a transfer of ownership which “Uncaps” the property and thus could result in significantly higher taxes in the subsequent years. This same example under Michigan law would be exempt from an “uncapping,” as Michigan law would consider this as being transferred to an entity under common ownership and control and thereby exempting such a transfer.
This is only one type of situation that may cause confusion to out of state property owners once the tax bill is received. It is always best to consult a professional that has knowledge and experience to save you from the harsh reality which may result if a transfer is done under an assumption of certain exemptions being applicable uniformly across state borders.