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Down Market is the Time to Challenge Michigan Real Estate Tax Assessments

You may hear the term “Proposal A” thrown around when people discuss Michigan property taxes. Proposal A was a referendum passed by the people of Michigan in 1994 which amended the State Constitution in a variety of ways related to the funding of public schools. As relates to the administration of real property taxes, Proposal A created what we now commonly refer to as “capped value”. Capped value is the concept which makes the recent downturn in the real estate market an ideal time to appeal the assessed value of your real estate with the Michigan Tax Tribunal.

Due to the changes in the law created by Proposal A, Michigan real estate values are “capped” for property tax purposes until the property is sold, or otherwise transferred. Unless there is a change of ownership, the Taxable Value of Michigan real estate cannot increase in any year by more than the lesser of (1) inflation, as measured by the Consumer Price Index or (2) 5%. In the simplest terms, this means that your property’s Taxable Value can be adjusted downward to match a rapid decline in property values but it cannot be adjusted upward to match a rapid increase in property values. That is why the recent downturn in the Michigan real estate market makes it a perfect time to appeal the assessed value of your real estate—these low Taxable Values can be locked in for as long as you own the property.

For example, assume a factory is purchased in 2011 for $500,000 (the same analysis applies to commercial and residential real estate) and the local Assessor agrees that the property is worth $500,000. The Taxable Value in the year after the purchase is equal to 50% of the True Cash Value, or in this example, $250,000. If the millage rate for the municipality in which the factory is located is 60 mills (or $60 per $1,000 of Taxable Value), then the 2012 property taxes on that factory will be $15,000. Assume further that the real estate market makes a comeback and the value of the factory increases by 6% per year for the next 5 years, while inflation is at a modest 2% per year for that same 5 year period. The taxes on that factory (assuming a constant millage rate) will only increase by 2% per year for that 5 year period, instead of the 6% by which the value of the factory increased.

The Michigan real property taxes on the factory in the example above are as follows:

2012 – $ 15,000

2013 – 15,300

2014 – 15,606

2015 – 15,918

2016 – 16,236

Total $ 78,060

Now, assume the same factory is purchased in 2011, in the same municipality, but the local Assessor says that the property is really worth 20% more than the purchase price, or $600,000. In this example, the Taxable Value in 2012 is $300,000 (50% of the True Cash Value). The taxes on this factory, using the same assumptions as in the first example, are as follows:

2012 – $ 18,000

2013 – 18,360

2014 – 18,727

2015 – 19,102

2016 – 19,484

Total $ 93,673

Because of the “capping” concept created by Proposal A, the difference between getting the factory assessed at its true value in the first year (the first example), and allowing the Assessor’s numbers to go unchallenged (the second example), is a savings of nearly $16,000 over 5 years; those savings will continue to grow for as long as the property is owned by the same party (unless Proposal A is changed via a vote of the people of Michigan).

While we cannot guarantee that any given property will have a $3,000 savings in the first year (as in the examples above), we have been successful in obtaining first year tax savings of more than $10,000 on commercial property, which equates to a 5 year savings in excess of $52,000 for the property owner (using the assumptions from the examples).

Michigan property tax assessment notices are mailed to property owners in February. If you feel the assessment on your property is greater than 50% of the true value of the property, we can sit down with you and discuss the process for appealing the assessment and do some hypothetical calculations to show the potential savings which an appeal may yield. Keep in mind that there are very strict deadlines for appealing an assessment so the sooner you decide whether to proceed with an appeal, the better.

Penzien & McBride, PLLC is a Michigan law firm serving Michigan businesses and individuals primarily in Macomb, St. Clair and Oakland Counties, near Detroit.