Home Sellers Save Transfer Taxes Using Little Known Exemption.

Our Canton and Plymouth home sellers are saving money big time by getting refunds on their Michigan Transfer Taxes incurred upon the sale of their primary residence.

Proposal A, which passed in 1994, drastically reduced property taxes and capped the yearly increases. This represented a huge savings to Michigan homeowners.

To alleviate the loss in tax revenue the Michigan Transfer Tax Act was amended to increase substantially the tax levied when a homeowner sells their property.

I know many sellers complain about the high transfer tax on sale but I have found myself reminding them that they have been saving thousands over the years of ownership due to the reduced property taxes.

However, now that home values have been decreasing, home sellers are getting hit with a double whammy…the drop in proceeds on the sale and the requirement to pay the high transfer tax on a sale where they are losing money.

There is a little known exemption in the Tax Act that has rarely been applicable until now. This exemption has been getting more attention as of late due to the lowering SEV (State Equalized Value) on homes.

Attorney General Mike Cox issued an opinion last week clarifying the proper application of this exemption. The opinion should afford certain home sellers immediate financial relief as Michigan’s real estate market continues its road to recovery.

Exemption “t”, as designated in the Michigan Transfer Tax Act, sets forth that a seller may seek an exemption from paying the state transfer tax if the following criteria are met:

1) The property must have been occupied as a principle residence and classified as a homestead property during the year of sale.

2) The property’s SEV for the calendar year of the sale must be less than or equal to the SEV for the calendar year in which the seller acquired the property.

3) The property cannot be transferred for consideration exceeding its true cash value for the year of the transfer.

With property values and corresponding SEV declining due to the struggling economy, many home owners and real estate agents took notice of the exemption’s possible applicability under the state transfer tax. However, absent an official interpretation, there was little awareness of its proper application.

As an example of how the exemption works let’s say you bought a house in 2007 for $220,000. You have lived in it as your primary residence and you registered the home with your city as a homestead property. You sold the property in 2008 for $180,000. Unfortunately, a typical situation in today’s market.

The SEV when you bought was $110,000 (half of purchase price) and let’s say your current SEV is $95,000. This scenario would satisfy the first two criteria above.

The true cash value in 2008 is 2 times the SEV or $190,000. Since the sale price is less than the true cash value the third criteria above has been met and you would be eligible for the tax exemption.

The Attorney General’s opinion provides immediate relief to home sellers already faced with the reality of declining value on their single greatest asset. The opinion also provides a uniform reading of the exemption that is necessary to provide consistent application among the various Registers of Deeds across the state as they are already receiving filings for the exemption.

Sellers should be cautioned that a request for the exemption that fails to meet all three criteria could bring a penalty equal to 20% of the tax assessed in addition to the tax due. Additionally, no similar exemption exists in the County Real Estate Transfer Tax Act.

email us at team@bittinger.com for more information. To apply for the exemption you must submit Michigan Department of Treasury form 2796.

Did you sell recently? Is your house up for sale now or are you about to put it on the market. This knowledge will help you save a bundle as our sellers are experiencing. Leave a comment below for more ways to save money in your next real estate transaction.