Separate Contract Terms for Sale of Land and Construction Limit Michigan State Real Estate Transfer Tax to Land Value Only
SALT Alert, June 28, 2006
Background
The Michigan State Real Estate Transfer Tax ("SRETT") is levied on certain written instruments when recorded, including contracts for the sale or exchange of property, and deeds or other instruments of conveyance of property, for consideration (MCL 207.521, et seq.). Under the statute, “value” for transfer tax purposes is defined as the current or fair market worth at the time of the transfer.
Taxpayer Win!
On June 6, 2006, the Michigan Court of Appeals issued a published decision in Lake Forest Partners 2, Inc. v. Michigan Department of Treasury, reversing a prior tax tribunal decision, regarding valuation of real estate for purchase agreements that include both the sale of unimproved property and a contract to build a house on that property. The appellate court concluded that the value of the property for purposes of assessing SRETT is determined at the time the parties execute the purchase agreement, as opposed to when the deed is recorded.
At issue in this case was the determination of when the transfer took place. The State argued that interest in the property was transferred by execution of the deed, so that the value for transfer tax purposes would include the constructed house as well as the land. The taxpayer, Lake Forest Partners 2, Inc., contended that the transfer of property took place at the time the purchase agreement was executed. Accordingly, only the value of the land should be included for transfer tax purposes.
In its analysis, the Court pointed out that “while the transfer tax is paid when the instrument is recorded, the transfer tax is assessed on the current or fair market worth at the time of transfer.” The Court then cited court cases showing that the execution of a purchase agreement transfers an interest in property, and, even though the transfer is of only an equitable interest in the property, the transfer of any interest in the property will suffice under Michigan law (MCL 207.523(1)(a)).
In his dissent, Justice Davis agreed that the “value” to be used is the value at the time of transfer, but contended that because the purchase agreements were not recorded, no transfer took place until the deeds were executed.
The case has been remanded back to the Tax Tribunal, which is expected to enforce the decision. The State filed a Motion for Reconsideration with the Court of Appeals on June 26, 2006. At this time, it is not known whether the State will file a petition for appeal to the Michigan Supreme Court.
Interestingly, the same taxpayer prevailed in a similar case involving the County Real Estate Transfer Tax ("CRETT", MCL 207.501, et seq.). By agreeing pursuant to a consent order to use one contract for the sale of the land and another contract for the construction of the house, the Washtenaw County real estate transfer tax will be assessed only on the value of the land.
Potential Refund and Planning Opportunity
Although all appeals related to the Lake Forest Partners 2 decision are not yet exhausted, the decision presents significant opportunities to potentially reduce SRETT and CRETT on future transactions involving the sale of land and the construction of a building. Likewise, taxpayers with transactions within the last four years that are factual similar to Lake Forest Partners 2 should consider filing refund claims.
Plante & Moran can assist you with assessing your real estate transfer tax planning and refund opportunities. Please contact us with your questions and for more information.
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.
