Skip to main content.
  1. News & Info

August 16 2012

Passing Property Without Increasing Taxable Value "“ The "Joint Tenancy" Exception

In 1994, Michigan’s voters approved “Proposal A.” A key feature of Proposal A limited annual increases in property tax assessments to the lesser of 5%, or the rate of inflation, until a property is transferred. The calculated tax assessment is called the “taxable value.” The local assessor still keeps track of the “state equalized value,” (“SEV”) which is theoretically one-half of the property’s market value. When the property is transferred, the taxable value is automatically increased to the SEV– usually referred to as “uncapping.”

For properties which have been under the same ownership for many years, a significant difference can build up between the taxable value and the SEV, resulting in property taxes significantly increasing when the property is transferred. For properties which have been held in the family for a long time – like cottages, hunting property, or farms – there can be a significant difference between the taxable value and the SEV. Since many of these types of properties pay the higher non-homestead tax rate, the property taxes can increase by thousands of dollars per year when they are transferred.

There are a number of exceptions in state law for certain transfers which do not cause uncapping, including an exception for the creation or termination of a joint tenancy. A joint tenancy is a type of ownership by two or more people, which provides that when one owner dies, the property automatically belongs to the other, without the need for probate.

If a family wants to pass property to the next generation, it can be done without uncapping the property taxes. If property is conveyed to children following the death of a parent by a will or trust, it becomes uncapped. Using joint ownership can be, however, a way to pass property to the next generation without causing the property to uncap.

Here is an example of how this would work: Mom and Dad own a cottage on Lake Michigan with a SEV of $400,000, and a taxable value of $300,000. While they are living, they use a simple deed to create a joint tenancy between Mom, Dad, and their only child. When they die, the property belongs to that child without probate and the property taxes do not become uncapped unless the child transfers the property.

This can work well sometimes, but is not meant for all situations. Joint tenancy is a “last man standing” type of ownership. If a parent creates a joint ownership with his/her two children, and one of the children dies first, that deceased child’s interest disappears and his/her family will be “cut out” of inheriting any part of the property. That is not what many families want in case a child predeceases.

Also, there are potential lifetime disadvantages to creating a joint ownership – you are making someone else a co-owner of your property while you are still alive. The State Tax Commission has ruled that reserving a life estate in the original owner does not avoid uncapping, so the original owner may lose sole control of the property during his/her lifetime. Also, there can be the usual problems with leaving multiple owners of a property.

If there are multiple descendants who do not all plan to keep the property, the disadvantages of joint ownership probably outweigh the advantages of avoiding uncapping for a short period of time. It also does not make sense to do this unless there is a significant gap between the SEV and the taxable value – and that gap is shrinking every year in most parts of Michigan.

If you do own property with a significant gap between the SEV and the taxable value, and you have only one person you want to leave it to, or your descendants want to keep the property indefinitely, there may be some real advantages to considering joint tenancy to pass along the property. A note of caution - in rare cases, depending on how the current owner acquired the property, creating a joint tenancy can also cause immediate uncapping. A title search might be necessary to make sure that does not happen, and you should not attempt to do this yourself.

Jim Scales of our office has given several presentations around the State on using the joint tenancy exception, and would be pleased to discuss this with you. You may contact Jim at 616-632-8047 or .