“This is not a tax bill” … Then what is it?

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Each year Michigan property owners receive a letter in the mail from their local assessing unit. On December 31 of the preceding year, each property assessment is otherwise “re-calculated” based on what is known as the Mass Appraisal Method. The often misunderstood “Notice of Assessment” provides important information regarding how a property is valued and ultimately taxed. So how does this all work? First, it is important to understand the basic terms involved:

  • True Cash Value (TCV): The estimated Fair Market Value / estimated usual selling price in the market.
  • Assessed Value (AV): Approximately 50% of the True Cash Value (TCV/2)
  • State Equalized Value (SEV): State and County equalization studies are conducted, and then applied to the Assessed Value (AV*1.xxx)

[SEV is tentative at this point, so we will refer to the assessment generally as Assessed Value (AV)]

“Okay … so what is my property worth?” Well, it depends on who you ask! The Mass Appraisal Method is not perfect, as the majority of changes occur in the aggregate and there are always outliers. The Michigan Tax Tribunal recognizes three valuation approaches:

  • Cost Approach (CA): Land Value + (Cost of Improvements – Depreciation)
  • Income Approach (IA): Rental Income / Capitalization Rate
  • Sales Comparison Approach (SCA): Usual selling price in the market

The Mass Appraisal Method is heavily dependent upon the Cost Approach, of which is then adjusted using various market-based factors. The problem with the Cost Approach is rather straightforward — what something cost does not necessarily determine the usual selling price in the market. When looking to purchase a property, a prospective buyer does not generally ask “how much did this cost to build 20 years ago?” the question tends to be “how much does a property like this usually sell for” or “what is a property like this worth in today’s market?” As for the Income Approach, such is generally limited to properties that are predominantly bought and sold for rental income. The Michigan Supreme Court has held that the Sales Comparison approach is the only valuation method that directly reflects the supply and demand for real estate in the market. Antisdale v. Galesburg, 420 Mich 265, 277 n1, 362 NW2d 632 (1984); Teledyne Cont’l Motors, Inc. v Muskegon Township, 163 Mich App 188, 193, 413 NW2d 700 (1987) 

Under Michigan law, property taxes are based on Taxable Value. Where real estate is owned for long periods of time, it is common for the Taxable Value of such to increase nominally compared to the Assessed Value. By law, Taxable Value increases are limited to the lower of inflation and five percent. Upon a transfer of ownership, the property would otherwise uncap, and the new Taxable Value would equal the Assessed Value as determined on December 31 of that year.

So what does this mean? Consider whether or not the stated True Cash Value (AV*2) is in line with what you believe your property to be worth. An appeal may be warranted where either:

1.  The usual selling price of the property is significantly less than two times the current Taxable Value — potential tax savings. 

  • Example:
    • AV=$75,000 | TV=$70,000 | TCV=$150,000 | Tax Rate=$50/per $1,000 of TV
    • Tax Liability = $3,500/annually (($70,000/$1,000)*50)
    • If the usual selling price = $90,000
      • Correct AV=$45,000
      • Correct TV=$45,000
      • Tax Savings= $1,250/annually ([(70,000-45,000)/1,000]*50)

2.  The estimated True Cash Value is significantly higher than the usual selling price — that a prospective uncapping of the Taxable Value would hinder marketability. 

  • Example:
    • AV=$75,000 | TV=$40,000 | TCV=$150,000 | Tax Rate=$50/per $1,000 of TV
    • Tax Liability = $2,000/annually (($40,000/$1,000)*50)
    • If the usual selling price = $90,000
      • Correct AV=$45,000
      • Correct TV=$40,000
      • Tax Savings=$0.00
      • Tax Liability Upon Transfer=$3,750/annually
        • Tax in Excess of Correct TV Upon Transfer=$1,500/annually

If you believe your property may be significantly over-assessed (whether residential, commercial, or industrial) feel free to give me a call to discuss.

Note: Check your Notice of Assessment to verify when the Board of Review meets to hear assessment protests. For residential property, a protest is required prior to an appeal to the Michigan Tax Tribunal.

Attorney Joseph C. Jones advises clients on estate planning, asset protection, business law, and real estate law matters. Joe can be reached at (906) 914-4181 or joe@jones.law. Jones Law PLC is a Michigan & Wisconsin based provider of legal services.

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