Uncapping the Property Tax Mystery

Let’s investigate how property taxes are determined, especially when they are “uncapped” due to the sale of property.

First, some basics. Assessed value is what your local Assessor reviews annually. This is adjusted to reflect the current market values. This tedious task uses the sale prices of the previous 2 years to indicate the state and trend of the market. The more sales that have occurred, the more data is available to generate a picture of the current market. The Assessor then uses this information to create an updated value of a property. Typically, a drive by of the property is also done. This helps the Assessor to be certain that properties of comparable quality and structure are being valued against other each other.

Taxable value is what taxes are paid on, and it uses a separate formula that has no connection to the current housing market, or recent sales. It is calculated by using the value of a property as of 1995. The value then moves up or down using the Consumer Price Index rate, not to exceed a change of 5%. For example, if the year’s calculated CPI was 7.9%, the effect on property taxable value is capped at 5%. If the CPI rate is lower than the 5%, then the adjustment to a property’s taxable value would reflect the lower percentage in the adjustment for that year. This is applied to everyone’s taxable value in Michigan. It is not subject to the Assessor or Board of Review to change. The voters chose this system with Proposal A in 1994. This cap has helped keep property taxes in check for the property owners.

Now comes the interesting part for property Sellers and Buyers. Following the sale of real estate, the local Assessor can change the taxable value. This is the only exception that uncaps the taxable value amount from the 5% limit. This is sometimes referred to as a “pop-up tax”. If there was any addition to or deletion from a property, it can now affect the taxable value directly. Things like paving a driveway, adding outbuildings or home additions can now be considered and may add to the value of a property. Deletions from a property, like removing old outbuildings, will also be considered.

The taxable value can never exceed the assessed value (Which is based on the current local market recent sales) so now and into the foreseeable future, the assessed value will be more than the taxable value. When in the market to purchase a property, it is advisable to not only review what the current taxable and assessed values of a property are but to utilize some additional resources to help discover how the price that you pay for real estate could change the property tax. One great resource is to visit https://www.michigan.gov/en/taxes/property/estimator. This government website gives good information on what to expect when the sale price of the property that is being considered changes the values. The sale of a property will cause the taxable value to be uncapped and most likely, an increase in property taxes will occur.

In northern Michigan, we often find properties that have not been on the market for decades. These properties may have been purchased originally as vacant land. They may not have had any adjustments to their taxable value since the 1995 rule was set in place. Particularly if the property has been improved during the intervening time, the taxable value on this type of situation will change and the “pop up tax” surprise can find Buyers unaware. A good real estate agent can help you navigate the research that needs to be completed on a property to make certain that you are prepared for the future potential tax scenario and are able to utilize the property as you desire.

To summarize, the assessed value of a property is what the property value is determined to be in the current real estate market by the Assessor on an annual basis. The taxable value is what determines the amount of property tax that is paid. It is based on a formula that is capped at a 5% increase maximum annually unless that property is sold. When this occurs, the Assessor will uncap the taxable value and adjust it closer to the assessed value. Minimize the surprise with a bit of research and be prepared for change. As we all know, change is the only sure thing in life!