When you plan on investing in the Michigan real estate market, you must consider what laws will directly impact your investments and what kind of toll those laws can have on your pocketbook. You especially must research constitutional amendments in the state that pertain to real estate.
One such constitution, Proposal A, can significantly influence any income you derive from properties you buy there. By researching and better understanding Proposal A, as well as working with an experienced real estate investment firm like Upside Investments, you can protect your portfolio and income you gain from your Michigan properties.
What is Proposal A in Michigan?
Proposal A is a state constitutional amendment that Michigan voters approved on March 15, 1994. Lawmakers at the time designed the amendment to limit property tax growth using a metric known as the Inflation Rate Multiplier, or IRM, until property ownership is transferred.
Before Proposal A, Michigan based taxes on properties on a metric called the State Equalized Value, or SEV. The SEV for a piece of property equaled 50 percent of the property’s true cash value. With Proposal A, Michigan now uses the taxable value of a piece of property to determine its taxes.
Further, under this amendment, the Michigan state tax commission now requires the assessing office to calculate the SEV for every property in the state within a certain timeframe. Property owners must know what their taxable statuses are on their properties by December 31, also known as Tax Day.
Additionally, each property in the state has a capped value, which is figured by multiplying the prior year’s taxable value with the adjustments for losses and additions by the IRM. This value cannot be increased by more than five percent.
The taxable value that property taxes are based on is the lowest value of either the capped value or SEV. As a rule under Proposal A, unless the SEV of the current year is less than the previous year’s taxable value multiplied by the IRM, the current year’s taxable value increases by five percent.
Proposal A and True Cash Value
Proposal A in Michigan defines true cash value as a property’s usual selling price. The actual selling price of a piece of property is not a controlling factor in true cash value or SEV that the assessing office determines. Even more, the assessing office will review all of the sales of applicable properties, excluding non-representative sales (such as foreclosure sales) from its assessment analyses when determining relevant assessment and sale charges.
Proposal A and Foreclosure Sales
As a real estate investor, you may be open to buying properties that are in foreclosure. You assume you can get them for pennies on the dollar, in many cases, and utilize them as solid sources of income.
However, before you buy foreclosed on properties in the state, you need to understand how Proposal A can affect them. In fact, this amendment takes into account that the sale of such properties does not include any distress from either the seller or buyer. It also precludes the assessing office in Michigan from considering foreclosure sales when determining these properties’ values for assessment reasons.
When it pertains to foreclosure properties in the state, the amendment stipulates that all distressed sales in Michigan involving mortgage foreclosure, or sales involving transfers to relocation companies, cannot be taken into account in the properties’ valuations. Foreclosure sales likewise cannot be utilized to indicate their value for market comparisons for current appeals or assessed values.
Disputing Assessments under Proposal A
Michigan allows property owners to dispute assessments under this proposal of their properties. If you do not agree with the assessing office’s final determination or believe other factors should come into play for it, you can contest its decision and potentially convince the assessing office to reconsider its decision. To start the process, you should contact the state’s assessing office, either in person or by mail.
Before you make contact with any questions or concerns, however, you should recall that, under this amendment, the SEV of your property is required to be at 50 percent of the market value. This fact stems, in part, because the neighborhood in which the property is located may have adjustments made to its value every year.
With that, you should base any appeals on the estimate of the current year’s market value that is lower than what the property’s SEV indicates. You have the right to request a free copy of your property’s appraisal card to learn what characteristics of the property determine its SEV. You likewise have the right to appeal the assessing office’s final decision in person or in by signed letter.
Using Proposal A to Your Advantage as a Real Estate Investor
As you study Proposal A in Michigan, you may have more questions than answers about how it relates to your properties and pocketbook. In fact, despite its complexity, you can use several strategies to use this constitutional state amendment to your advantage as a real estate investor.
For example, you can learn how the shift from Assessed Value, or AV, to Taxable Value, or TV, can impact any tax increases you may face as an investor. By researching it, you can prepare accordingly for predictable increases in taxes on properties in the state that you own.
Further, you should also understand how uncapping rules can impact your properties and property taxes. You especially need to consider this before you sell or transfer ownership of any of your properties to someone else.
Additionally, Proposal A got rid of roll ups that local governments could include in their millage rates when property values were less than inflation. As a property owner, you should know how the elimination of roll ups can impact the budget planning and tax rates in the neighborhood or city in which you own properties.
Proposal A can significantly impact the purchase and sales of investment properties in Michigan. As an investor, it is understandable that you would want to understand this state constitutional amendment better. At Upside Investments, we can explain this law to you fully. Investing in real estate in Michigan can be challenging. Upside Investments has the experience and expertise to help you today.
