New Year Brings New Uncapping Rules

As addressed in a prior post, the laws about uncapping real estate taxes have become more complex and significant. Recent additional changes in the law have dramatically improved the situation. The law is MCL 211.27a.

As of January 1, 2015, certain types of property that passes to certain related individuals will not uncap if the property passes at death through a probate estate or trust.

Specifically, the type of property included in this exemption is “residential real property.” This term is defined in MCL 211.34(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.

(f) Timber-cutover real property includes parcels that are stocked with forest products of merchantable type and size, cutover forest land with little or no merchantable products, and marsh lands or other barren land. However, when a typical purchase of this type of land is for residential or recreational uses, the classification shall be changed to residential.

Accordingly, the term “residential real property” is a much more expansive than property that would qualify as a personal residence for property tax purposes. However, and this is important, to avoid uncapping, the “residential” property cannot be used for “any commercial purpose.” This would seem to eliminate things, such as apartment buildings, that would otherwise fall within the definition of residential real property as defined in MCL 211.34(c).

Specifically, the individuals to whom such property may pass without uncapping are as follows: a parent, sibling, child, grandchild, or grandparent of the person who owned the property or of that person’s spouse.

The details regarding the application of these new rules are set out in guidelines prepared by the Michigan State Tax Commission. To read those guidelines, click here. This bulletin answers a number of questions about how the law applies to specific situations.

Notably, the increasingly popular “ladybird deeds” are the odd man out. That is, property passing by ladybird deed (or any other reserved life estate deed) will uncap. For reasons I have previously addressed, in my opinion, the routine use of ladybird deeds as a basic estate planning tool is already a bad idea. This law should give planners additional reasons to consider whether it makes sense to use a ladybird deed in a traditional estate planning context. Of course a ladybird deed to trust could still accomplish the same objective – but outside of situations in which the individual owner is receiving long term care Medicaid benefits, there would seem to be no reason to engage in such planning.

These new rules supplement, and do not supplant, the expansion of uncapping exemptions addressed in my prior blog post on this topic – which exemptions apply to lifetime transfers of the same type of property to the same class of persons.

This law is a great gift to estate planners, but let’s not be overly giddy about it. In many cases, uncapping property taxes is a negligible concern, and other planning objectives will trump the benefit of preparing an estate plan designed solely or primarily to avoid property tax uncapping.