Michigan Real Property Tax
Change in Entity Ownership Uncaps Taxable Value 
SALT Tax Alert, February 23, 2006

Under Michigan’s “Proposal A,” the annual increase in taxable value of real property is generally limited to the increase in the U.S. Consumer Price Index (i.e., rate of inflation) in the immediately preceding year or five percent, whichever is less, until ownership of a parcel of property is transferred. Upon transfer of ownership, the parcel is reassessed at 50% of its current true cash value.

“Transfer of ownership” is defined in the General Property Tax Act to include a conveyance of a more than 50% interest in a corporation, partnership, sole proprietorship, limited liability company, limited liability partnership, or other legal entity owning real estate. Transfers among an affiliated group of corporations and commonly controlled entities, including corporations, partnerships, limited liability companies, limited liability partnerships and other legal entities, are excepted from the definition of "transfer of ownership."

Uncapping of taxable value ruled to also apply when there is a more than 50% ownership change in a higher tier entity.

On February 14, 2006, the Michigan Court of Appeals issued published opinions in two companion cases, Signature Villas, L.L.C. v City of Ann Arbor, and Burlington Property, L.L.C. v City of Ann Arbor, holding that real estate taxable value uncaps when there is a more than 50% change in the ownership of a "Holding LLC" that owns another LLC, that in turn owns commercial real estate.

The purchaser-taxpayer of the interest in "Holding LLC" argued that taxable value uncapping only applies to transfers of direct interests in an entity that owns the real estate. As there was no direct ownership change of the lower tier LLC (i.e., it still was owned by Holding LLC) that owned the real property, the taxpayers positioned that there was not a "transfer of ownership" for property tax purposes, and consequently, no taxable value “uncapping.” However, the Court of Appeals agreed with the Tax Tribunal and held that when there is a greater than 50% change in beneficial ownership, the underlying property is deemed transferred and the taxable value can be uncapped.

Required Filing
As a reminder, upon request of the local assessor, the legal entity which has undergone a more than 50% ownership change is required under the statute to notify the local assessing officer within 45 days of the change by filing Form 2766 - Property Transfer Affidavit. If the affidavit is not filed, a penalty of $5 per day (maximum $200) applies. The form is available at: http://www.michigan.gov/documents/l4260f_2688_7.pdf

It is important to note that the property tax “uncapping” laws are separate from the laws that determine when Michigan Real Estate Transfer Tax (MRETT) applies.

Plante & Moran can assist you in determining the applicability to your transaction of property taxable value uncapping and real estate transfer tax. Depending on your facts, planning opportunities may exist. Please contact us if you have questions and for more information.

Disclaimer:  The information provided in this alert is only a general summary and is being distributed with the understanding that Plante & Moran, PLLC is not rendering legal, tax, accounting, or other professional advice or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.