Tax Consequences for Taking Title in Real Estate in Michigan

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Hello Everyone, My name is Alicia Kellogg, and I am the on-staff attorney for Access Title Agency. Back in August, I spoke briefly about tips related to uncapping property taxes. This month I wanted to focus on some of the biggest tax considerations as part of a real estate transaction when it comes to both buyers and sellers. Tax issues can be quite complicated so it is important to consult with someone if you have specific questions over a transaction.

All too often, tax issues are overlooked in real estate transactions. While most people concern themselves with the purchase price and possession date, they fail to fully consider the implications of taxes on the transaction.

While negotiations cannot affect the amount of property taxes, they can affect who pays the taxes in the year of the sale.

Real property taxes are based on the assessed value of the property. Normally a sale reflects an increase in the value of property and therefore the assessment increases. The increase in assessment will then cause an increase in the taxes on the real property.

So, the buyer should anticipate a higher taxable value when budgeting for the costs and expenses of owning a piece of property.

Note: The buyer of real property is required to notify the assessor of the transfer by filing a property transfer affidavit within 45 days of the date of transfer.

Assessments are set by local officials, which are usually referred to as the township assessor. And these assessments are set on December 31 of the year before the tax is levied.

Because the assessments can change tremendously in some scenarios, it is always best that the buyer understands this before purchasing the property. Buyers have to be aware that, in most cases, purchasing a piece of property will cause the assessment to uncap. So while the seller’s property taxes were low, the buyers could later turn out to be much higher than expected.

So it is important to do your research, don’t ignore the issues of taxes, and consult someone if you are unsure.

P.S. Don’t forget to pay your Winter 2017 taxes!

Then there is transfer tax and the exemptions. Michigan imposes transfer taxes on any conveyance of a real property interest for consideration. And there are two transfer taxes in Michigan: county and state.

Transfer taxes must be discussed in any real property transaction. They are charged to the seller unless it is negotiated that the buyer pays those funds. In larger transactions, transfer taxes can be significant. But there are also many exemptions for transfer taxes to pay attention to. When you record a deed, a number of exemptions to state and county transfer taxes may apply to the transition. Some of the common exemptions are where consideration is less than $100, a transfer between husband and wife, a transfer that creates a joint tenancy with a current owner, or where the transaction is a land contract in which legal title does not yet pass.

So whether you are the buyer or seller, there are several tax considerations that you will not want to overlook. It is important to be aware of them and talk about the taxes during negotiations. Again, while you cannot typically change the amount owed, you can negotiate who will pay them and how you will prorate them.

By Alicia Kellogg

Alicia Kellogg is Access Title Agency’s new on-staff attorney for the Traverse City and Suttons Bay, Michigan offices. She graduated cum laude from Western Michigan University Cooley Law School and is licensed to practice law in the State of Michigan. Contact info: akellogg@accesstitleagency.com or (231) 539-1203.

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