For most home buyers one of the more significant costs that must be understood are property taxes. Property taxes in Michigan can be difficult to understand because of the way the laws are set up. It may sound unfair, but a new owners taxes could be significantly higher than the owner that just sold the property. Why you may ask…because Michigan in the 1990s had a law change called Proposal A that basically set up the structure for property tax increases and decreases. The basic premise is this. An owners property taxes, once the home is purchased and after the first year of ownership, can only increase by a set amount which is generally believed to be 3.5% of the taxable value times the millage rate or the increase in consumer price index (CPI), whichever is less. This is my understanding and I would welcome any tax experts to further expand on this post.
There are 4 important numbers a new home owner needs to know. First is the taxable value of the home that is set by the local government which is very different depending on which city and school district the home is in. Second is the assessed value which is also set by the local government. Teh assessed value has long been believed to be one half of what a home should sell for but recently this has been proved very wrong due to economic conditions. Third is the millage rate which is also set by the local government. And fourth is the purchase price of the home.
The taxable value is most important to the current owner because that is the number that is used to determine the property taxes for the current owner. So, lets say a home’s taxable value is $50,000, the assessed value is $70,000 and the home is in the City of Grand Rapids and the owner occupied millage rate is roughly 29 mils. For the current owner the property taxes would be $1,450 per year ($50,000 x .029 mils). Now lets say the home is sold for $140,000 (twice the assessed value), the new owners property taxes would be $2,030 per year ($70,000 x .029 mils).
Why did the property taxes increase so much? Part of Proposal A stated that once a property is sold, the property taxes “Uncap” the first year and the homes taxable value is brought up to be level with the assessed value. So that is where the $70,000 number became important. Now to confuse us all even more Proposal A also stated that if a home sold for more than twice the assessed value the home would be “reassessed” to one half of the purchase price. So on that same home, if it were to sell for $160,000, would have propery taxes of $2,320 ($80,000 x .029 mils).
Here is where it gets really confusing. Many buyers and even real estate agents and mortgage lenders assume that if a home sells for less than twice the assessed value that the assessed value will automatically drop to half the purchase price. So let say that the home above sold for $90,000. Many people mistakenly believe the government would lower the assessed value to $45,000 (one half the purchase price of $90,000), making the property taxes $1,305 per year ($45,000 x .029 mils). In fact I have talked with several buyers who had agent or lenders tell tham that is exactly what would happen. When it didn’t happen that way, these buyers got upset. In fact, the government still has the right to “Uncap” the assessed value and raise it to the $70,000 number above. So in this instance a buyer may think because he has been told by people he trusts, that his property taxes would be $1,305 when in actuality the property taxes could be $2,030 per year ($70,000 x .029 mils). That is a big hit in monthly payments, approximately $725 per year or $60.41 per month. You can see why this buyer was upset.
Now you do have the legal right once you own the home to “fight” your assessed value in the spring of each year and in fact, several homeowners that I know have been successful at fighting and were able to lower their property taxes significantly. If you would liketo know more about a particular property’s taxes, taxable values, assessed values or millage rate please don’t hesitate to contact Home Run Real Estate at 616-217-4166.
This blog is just a brief starting point to help you understand property taxes. And, this discussion only refers to owner occupied property taxes. Without confusing you even more, investors property taxes are significantly higher than an owner occupants. We are in no way representing this to be legal to tax advice. We encourage you to seek competent legal advice and tax advice.
