Tax break possible for owners of Michigan rental property

For owners of rental property, a new Michigan bill could mean a lower property tax bill and a simplified method for calculating taxable value.

Recently, Governor Rick Snyder signed a bill that will provide a small tax break for Michigan rental owners. The legislation, sponsored by Senator Vincent Gregory, received bipartisan support. The new law does something unusual - it simplifies the tax code for those who own income-producing property.

The measure codifies a Michigan Supreme Court case that limited the use of occupancy rates when determining a rental property's taxable value. In addition, the governor's press release indicated the bill would improve customer service for owners and residents.

Taxable value of income-producing property

Michigan property taxes cannot increase more than five percent per year even if the value increases at a faster rate. When you purchase a property, however, it in effect "uncaps" the tax rate. In the year of the sale or transfer, the Tax Tribunal determines the true cash value (TCV). Michigan property assessments are 50 percent of the TCV under the state constitution.

"Fair market value" is synonymous with TCV, so one might expect this usually would be the sales price. In a recent case, the owners purchased an Ann Arbor rental property at a bank foreclosure sale for approximately $157,000. The prior owner was a family member.

The Tax Tribunal determined that the TCV was actually $400,000. The property owner appealed the finding arguing that the correct valuation while higher than the sale price was not nearly $400,000, but closer to $180,000.

Three valuation approaches exist to determine TCV. These include the sales comparison, cost less depreciation and capitalization of income.

The Tax Tribunal relied on two analyses. A market-based approach looked at three similar properties within several blocks and came to a TCV of $360,000. An income based approach reached a higher number by comparing similar rental properties. The gross rent multiplier was 8.36 and resulted in a TCV of $411,312. The Tax Tribunal found the most reliable method was to combine the approaches.

In their appeal, the owners raised three main arguments. The first was that the purchase price is presumptively the TCV under statute. The appellate court rejected the assertion, because a foreclosure sale by auction is not included in the definition of "at private sale." A second argument that the income based approach failed to account for past rental losses was rejected "as speculative and insufficiently documented." The third argument related to repairs and maintenance that cannot be considered in TCV determinations, but it also failed for lack of proper documentation to support when the repairs actually occurred.

How an attorney can help

This case illustrates the complexities of Michigan property tax law. When considering purchasing a rental property, contact an attorney to discuss possible valuation issues that could affect taxes. If a valuation appears unfairly high, a property tax appeals attorney can assist in challenging TCV and explain the documentation needed to support an appeal.

Keywords: rental property valuation appeals, taxable value of Michigan property