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December 27 2013

Property Tax Developments - What to Expect in 2014

By: Andrea D. Crumback

Intrafamily Transfers

Exempt transfers.  As of December 31, 2013, a transfer of residential real property to a person related by blood or affinity to the first degree will no longer result in an uncapping of the taxable value of the property, as long as the subsequent use of the property does not change.  According to the State Tax Commission, “blood or affinity to the first degree” includes the following relationships: 

  1. Spouse
  2. Father or mother
  3. Father or mother of the spouse
  4. Son or daughter
  5. Adopted son or daughter
  6. Son or daughter of the spouse
  7. Siblings

Transfers that are not exempt.  Note that property transferred from a grandparent to a grandchild, among others, are not included within the exemption because these relatives do not meet the definition of “blood or affinity to the first degree.”  Therefore, these transfers will continue to result in an uncapping of the property’s taxable value. 

Transfers most likely not exempt.  Because the exemption requires a first degree relationship by blood or affinity between the transferor and the transferee, the exemption from uncapping does not appear to include a trustee’s transfer of real property placed in a trust to a person related to the creator of the trust by blood or affinity to the first degree, a limited liability company’s transfer of property, or a personal representative’s transfer of property that is part of a probate estate to a person related to the deceased person by blood or affinity to the first degree.  The statute seems to require a direct person-to-person transfer of the property.  Once the property is placed in a trust, a limited liability company or a probate estate, it creates a degree of separation not included in the plain language of the statute. 

Estate planning attorneys often recommend placing real property assets in trusts to avoid probate or minimize estate taxes.  If a person has followed this estate planning strategy, it may be appropriate to uncap the taxable value of property held in trust, even when the property is being transferred from a trust established for the benefit of a person with whom the transferee is a first degree relative by blood or affinity.  The State Tax Commission’s position is that the exemption from uncapping does not apply to property held in a trust, a limited liability company or a probate estate. 

Persons who wish to keep certain real property within their immediate families and avoid uncapping of the property’s taxable value may try to utilize a “ladybird” deed.  A “ladybird” deed would allow the property owner to keep control of the property during his/her lifetime, and then allow the property to pass to his/her children (or other designated relatives related by blood or affinity to the first degree) upon his/her death without the need for probate.  Depending on the combinations of vehicles used, this approach could comply with the requirements of the intrafamily exemption until the Legislature or appellate courts provide further guidance on these issues.  Each and every claim that an intrafamily transfer is exempt should be carefully evaluated to ensure there are not degrees of separation that may disqualify the transfer from exemption.

Status of Big Box Tax Appeals

Opinions and settlements have been entered after the Tribunal’s September 2010 decision in Target v City of Novi that have significantly reduced the values of a large number of big box stores across the state, including among others, Meijer, Kohl’s, Target, Lowe’s, and Home Depot.  The legal definition of “true cash value” directs the Tax Tribunal to consider the “existing use” and “present economic income” of the store.  Beginning with Target v City of Novi, the Tax Tribunal has been valuing operating big box stores by comparing them with sales of vacant stores that have gone out of business and have been converted in many instances to different, nonretail uses.  

In January 2013, Marquette Township filed an appeal against Lowe’s with the Court of Appeals challenging the Tax Tribunal’s valuation methodology of valuing the Lowe’s store and other big box stores as if they were failed “dark” stores, i.e., they were vacant and had to be sold at deep discounts for secondary uses.  This appeal has been consolidated with a similar appeal filed by Breitung Township against Home Depot.  A decision is expected sometime in 2014. 

In the meantime, a proposed House bill was introduced in September 2013 seeking a statutory mandate directing that the Tribunal and courts value such properties by examining the specific and existing use of the property at the time of assessment “as long as it is financially feasible and more profitable than modification or redevelopment.”  The bill has been referred to the Committee on Tax Policy for further consideration.

What’s New at the Tribunal

The Tax Tribunal reported at a State Bar luncheon this month that its electronic filing system will be operational on or before February 3, 2014.  The e-filing system is not mandatory, but will provide immediate access to all electronically filed pleadings, including appraisals.

The Tribunal also reported that it will more strictly enforce appraisal deadlines, and stressed the importance of timely filing appraisals to avoid the risk of entry of default against the noncompliant party which would prevent this party from presenting evidence on its behalf at hearing.  Based upon these comments from the Tribunal, it is important to contact your property tax attorney in the early stages of a full Tribunal proceeding, rather than waiting until a few weeks before appraisals are due.

2013 Charitable Exemption Case Summaries

Below are summaries of the 2013 cases addressing charitable property tax exemptions under MCL 211.7(o).  As the case summaries demonstrate, determining whether an entity is entitled to an exemption requires a careful analysis of the specific operations of the entity requesting the exemption.

Not Exempt from Property Taxation:

Free student housing provided by nonprofit organization not exempt.  A self-governing scholarship house providing free room and board during the academic year for 20 to 30 students enrolled at the University of Michigan each year is not charitable, primarily because it chooses who, among the group it purports to serve, deserves the services.  Telluride Association Inc v City of Ann Arbor, Court of Appeals Docket Nos. 304735 and 305239, July 16, 2013.

Adult foster care facility not exempt.  An adult foster care facility providing specialized residential services to adults and children 16 years of age or older needing rehabilitation from traumatic brain and spinal cord injuries and other disabling conditions is not exempt as a charitable organization because regardless of the patients’ inability to pay, the taxpayer is always able to recoup full or at least partial payment in return for the services that it renders at the subject property.  Hope Network-Rehabilitation Services v City of Kentwood, MTT Docket. No. 412553, July 3, 2013.

Home health care providers’ offices not exempt.  A portion of a charitable organization’s property leased to two nonprofit corporations that are wholly owned by the taxpayer and that provide home health care services are not exempt because they cannot prove that they provide services in a nondiscriminatory manner or that they charge no more than what is needed to maintain their operations.  Porter Hills Presbyterian Village Inc v Township of Grand Rapids, MTT Docket No. 416076,  August 6, 2013.

Exempt from Property Taxation:

Medical equipment co-owned by hospitals exempt.  Laboratory equipment in an offsite laboratory owned jointly by several nonprofit hospitals is exempt even though the laboratory equipment is occasionally utilized by a for-profit company to provide commercial testing services when the equipment would otherwise go unused and when the for-profit use benefits the charitable use of the property by reducing testing costs to the nonprofit hospitals.  Michigan Co-Tenancy Laboratory/Trinity Health v Pittsfield Charter Township, Michigan Court of Appeals No. 310376, November 14, 2013.

Religious camp exempt.  An Islamic camp with lodging and related facilities open to people of all faiths and where the facilities are available for use and have been used by outside organizations for minimal or no fees is exempt.  Camp Retreats v Township of Marathon, MTT Docket No. 316969, March 27, 2013.

Nonprofit housing assistance corporation exempt.  A taxpayer engaged in credit counseling, foreclosure, home buyer education, financial literacy, limited home repair, and acquisition and rehabilitation of houses in the City of Detroit that does not charge for these services and makes its services available to everyone, with the exception of certain services that require a person to meet the income guidelines as established by HUD, is exempt.  U-Snap-Bac Inc v City of Detroit, MTT Docket Nos. 393496 and 415014, April 22, 2013. 

Preschool-related property exempt.  Property containing a structure used by a preschool for storage of school-related items, where the land is used as an extension of the playground area for composting, gardening and other physical activities with the children almost daily is exempt.  Allen Creek Preschool v City of Ann Arbor, MTT Docket No. 409603, June 28, 2013.

 

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