Michigan real estate transfer tax exemptions
The State of Michigan imposes a transfer tax on the sale or transfer of real property. The tax is assessed on the fair market value of the property at the time of the transfer and transfer is imposed on the seller of the property. The tax rate is $3.75 for each $500 or fraction thereof of the total value of the property transferred. In addition, there is a county real estate transfer tax that is assessed at the rate of $0.55 per $500 or any fraction thereof.
Exceptions to the above transfer event are found in the state transfer tax statute. One is a distribution of real property when an entity is dissolving, and a second is when the real property is distributed to the partners/shareholders, provided that the distribution of property is pro rata to all of the owners. Another exclusion is when the state equalized value (SEV) of the property when the property was purchased is equal to or greater than the SEV when the property is later transferred. A fourth notable exception is when property is transferred pursuant to a foreclosure, deed in lieu of foreclosure, or when transferred to a trustee/receiver in a bankruptcy proceeding.
In the partnership, LLC, and corporation setting, the state, but not the county, transfer tax applies when an entity has 90 percent or greater of the fair market value of its assets comprised of real property and a controlling interest is sold or transferred. A controlling interest is defined in this statute as greater than 80 percent of the total value of all classes of stock of a corporation and greater than 80 percent of the profits and capital of a partnership or LLC.
Tax savings opportunity
In some client cases, there may be an opportunity for a transfer to be exempt from the state transfer tax if the transfer is structured properly.
Analysis of the tax savings opportunity
In order for the transfer tax to be assessed on the transfer of a controlling interest in an entity, the value of the real property must be 90 percent or greater of the value of the entity’s total assets.
The simplest way to structure the deal so that the transfer tax does not apply is to infuse assets other than real property into the entity so that the value of the non-real property assets are greater than 10 percent of the value of the entity’s total assets.
A more limited area of opportunity is to fail to meet the controlling interest definition. Because it includes greater than 80 percent of both the profits and capital for a partnership or LLC, there is room to structure the transaction so that less than the 80 of the capital is being transferred even though greater than 80 percent of the profit interests are being transferred.
There are many exemptions to the Michigan State Real Estate Transfer Tax. By being familiar with some of these more common exemptions, transferors may permanently save this real estate transfer tax. Please refer to State Real Property Transfer Tax Act for a complete list of exemptions.
If you would like to explore what opportunities may exist for structuring your transaction to reduce the impact of the real estate transfer taxes, please contact Dean Rocheleau using the information on the sidebar of this page.