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Uncapping of Commercial Real Estate Assessments

Most are aware that the taxable value assessment of a commercial property is uncapped on its sale, but it can also uncap in the event of certain other transfers which do not involve the sale of property and the recording of a deed.

By way of background, Michigan real property taxable value assessments are “capped” and can only increase year-to-year at the lesser of 5% or the rate of inflation. Section 211.27a(6) of the General Property Tax Act defines “transfer of ownership” generally as the conveyance of title to or a present interest in property, the value which is substantially equal to the value of the fee interest. Section 211.27a(6) provides a variety of examples of what constitutes a transfer of ownership for taxable value uncapping purposes.

Many are unaware that the sale or transfer of an ownership interest in an entity which owns real property is a transfer of ownership of the entity’s real estate for tax purposes if the ownership interest sold or transferred is more than 50% of the total ownership interest in the entity. In other words, if you sell or transfer more than half of the ownership interest in an entity owning real property, you have created a “transfer of ownership” of the entity’s real property for real estate tax purposes. This provision is applicable to stock in a corporation, membership interests in a limited liability company and percentage ownership in a partnership. Such a sale or transfer will result in the “uncapping” of the property tax assessment of all real property owned by the entity. By way of example, suppose John Doe owns a majority of the ownership interest in Universal Widget and transfers it as a gift to his son, Peter Doe. The transfer will result in the uncapping of the property tax assessment on all real property owned by Universal Widget. If the transfer occurs in increments over time, the lifting of the taxable value cap occurs at the point John Doe no longer owns the majority interest in Universal Widget.

When a majority ownership interest in an entity has been sold or transferred, a Real Estate Property Transfer Affidavit must be filed with the local assessor. Section 10 of the Affidavit states “Type of Transfer: Transfers include, but are not limited to, deeds, land contracts, transfers involving trusts or wills, certain long-term leases and business interest.” Failure to timely file the Affidavit permits the assessor to go back and increase prior tax assessments (after the transfer took place) to adjust the property tax assessment, possibly resulting in (i) an increased assessment resulting in increased property taxes, (ii) interest on the difference on the tax that was paid and the tax that should have been paid and (iii) penalties.

Any time you are contemplating a sale or transfer of an ownership interest in an entity which owns real estate you should consult with your attorney about the means and ramifications of your proposed transaction.

Fraser Trebilcock’s Real Estate team has a depth of experience in advising clients on all issues of property law, and they strive to have their clients’ interests protected. You can contact them at (517) 482-5800, or by filling out the contact form here.