Buying a New
Home? Property Information That You Should Know
Without a
doubt, the most common question of the assessor’s office since
the passage of Proposal A of 1994 is “What will the property
taxes be on a property in the year following the purchase?”
In most states, this is a question easily answered, but in
Michigan this is a question that is seldom answered before the
beginning of the new tax year.
In 1994,
the voters of Michigan passed a referendum commonly known as
Proposal A. Proposal A originated as a reformation of K-12
education funding but is becoming more renown for the provision
in the enacted law that allows for the “uncapping” of a
property’s taxable value in the year following a transfer.
Hopefully, the following information will explain this
particular provision and its impact on the new property owner.
Every
property in the State of Michigan has three values calculated
for it. The first is the Assessed Value, which is
the value calculated by the assessor and then through the
equalization process transforms into what is commonly referred
to as the SEV (State Equalized Value); the second is the
Capped Value and the third is the Taxable Value.
The two values that will be focused on here are the assessed and
taxable values.
Assessed Value
The
assessed is a value equal to 50% of the property’s true cash
value as determined on December 31st of the previous
tax year. An example of this is if a property’s true cash
value calculation is $70,000 based on its December 31st
2007 status, the assessed value for 2008 would be $35,000 (50%
of true cash value). That calculation formula is easy
because it is the same for all parcels and there is no “cap in
value” to deal with for the assessed value.
Taxable Value
The
taxable value calculation has variables that do not make it
the same for all properties. In cases where a property has
not experienced a transfer of ownership in the previous year,
the taxable value will be determined by:
1.
taking the previous year’s taxable value;
2. subtracting
any property loss that may have occurred (demolition);
3. multiplying
the result of 1-2 (above) by the
Consumer Price Index (CPI) as established annually by the
Michigan State Tax Commission; and finally,
4. adding any
new value (new construction) that may have occurred in the
previous year.
That sounds
complicated and in some instances can be, but the majority of
properties will calculate using the simple formula that does not
have any new value or less of value.
The
following is an example of a typical annual taxable value
calculation:
$ 30,000 = 2007
Taxable Value
No property loss
No new construction
CPI
x 2.3%
$ 30,690 = 2008 Taxable Value
This capped
taxable value formula is a guaranteed protection the voters of
Michigan gave themselves to ensure that their taxable values
from one year to the next could not increase by more than the
CPI, or 5%, whichever was less, as long as they were the owners
of the property (and nothing had changed in the physical status
of their property such as new construction). The taxpayers
in Michigan need look no further than across the border to their
neighbors in Wisconsin, whose tax system does not include this
“capped” formula protection, to realize how fortunate they truly
are.
In
Wisconsin, if the true cash value of a property is $70,000, the
owner pays the taxes on $70,000. If the value of the
property increases by 10% (in this example, $7,000) then the
next year the owner begins paying taxes on a property worth
$77,000. That same value scenario for a property located
in Michigan would have resulted in an increase that is capped by
the previously mentioned formula for the taxable value (2.3%
increase for 2008) versus the 10% increase under Wisconsin tax
laws.
Knowing
these basic principles concerning the property tax formulas will
help you understand what happens to the property’s taxable value
after a transfer of ownership. The “capped taxable value”
formula that was demonstrated earlier relates to properties that
have not experienced a transfer of ownership in the previous
year. The “uncapped taxable value” is the term used to
describe the taxable value
calculation in the year
following a transfer of ownership. This calculation is
very simple.
In the year following a transfer, the uncapped taxable value will be the
same value calculated as the SEV.
In other words, the taxable value will be equal to 50% of true
cash value. An illustration of this using the values from
the previous example would show that if the true cash value of
the property was determined to be $70,000 on December 31, 2007,
the 2008 state equalized AND taxable values would be $35,000
(50% of the true cash value).
It is easy to see that the
difference the transfer of ownership has made for the taxable
value is the difference between what would have been the capped
value of $30,690 and the now uncapped value of $35,000.
Fortunately for Michigan taxpayers, it is only in the first year
following the transfer that the calculation is done in this
manner. In the 2nd year following the transfer
of ownership, the property will once again enjoy the protection
of the “cap” until the property experiences its next transfer.
One of the frustrations for
potential buyers who are trying to determine what the uncapped
taxable value will be on the property they buy is that the
assessing cycle that most assessor work under does not allow for
a calculation of an exact assessed and taxable value for the
following tax year until all sales studies have been completed
and analyzed by both the local assessor and the Equalization
Department. The results of those studies are typically not
integrated into the value calculations until late in the
year. So, while most
property owners can estimate their next year’s taxable value by
multiplying the new CPI by the previous year’s taxable value,
property owners whose properties experienced a transfer of
ownership must wait until the assessor has determined the
assessed value to know for sure what the taxable value will be.
Michigan’s property tax laws are
complicated and contain many provisions that can affect the
taxes paid on a property. Although not specifically
addressed here, there are different types of transfers of
ownership that can occur that will “uncap” a property’s taxable
value. Property owners should be aware that many of these
transfers do not involve an actual sale, but come about as a
result of estate planning, family sales, etc.
Property owners should inform
themselves of the consequences that an instrument of transfer
may have on their property taxes. This information can be
found by accessing the State of Michigan - Treasury website.
“Transfer of Ownership and Taxable Value Uncapping Guidelines”
is the name of the link. Property owners without internet
capability can contact their local assessor’s office to obtain a
copy of the guidelines.
As a taxpayer in the City of Bay
City, you are concerned about paying only your fair share of
taxes for services provided and received. In the City of
Bay City we understand and appreciate those concerns.
The Assessor and staff is
available to assist you with your property tax questions during
normal business hours, 8:00AM – 5:00PM, Monday through Friday.
Please feel free to contact the Assessor’s Office during these
times if you need assistance or have questions about your
property tax assessment.
Amy L.
DeHaan-Legge
Assessor
301 Washington Avenue
Room 207
Bay City, MI 48708
(989) 894-8123 – phone
(989) 894-2312 – fax
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