The Michigan General Property Tax Act (the Act) requires real property in Michigan be assessed yearly and taxed at one-half (1/2) of its true cash value (true cash value is the same as market value). However, with the passage of the Headlee Amendment to the Michigan Constitution in 1994, limitations were placed on how much assessments and taxes could go up each year. Since 1994-1995, annual property tax increases have been “capped” at levels specified in the Act and remain capped until a “transfer of ownership” occurs. Once a transfer of ownership occurs, the property is reassessed at one-half (1/2) of the “true cash value” as of that date and the taxes, in most cases, go up substantially. The property tax is capped at the new, higher amount until the next transfer of ownership takes place (Michigan property tax bills show a “Taxable Value” and a “State Equalized Value.” The Taxable Value is the capped value upon which the property tax is assessed. The State Equalized Value approximates one-half (1/2) of the true cash value/market value of the property. Once the property tax is uncapped, the State Equalized Value and the Taxable Value become the same for the year in which the uncapping occurred and the cap goes back into effect at that amount).

The key term in all of this is “transfer of ownership,” which basically means a conveyance of title to, or a present interest in, real property. However, not all conveyances constitute a transfer of ownership. One such exclusion is for a transfer of ownership between two or more persons that creates or terminates a joint tenancy if

1. at least one of the persons was an original owner of the property before the joint tenancy was initially created, and,
2. if the property is held as a joint tenancy at the time of the conveyance, at least one of the persons was a joint tenant when the joint tenancy was initially created and that person has remained a joint tenant since that time.

In 1959, James and Dona Klooster, as husband and wife, acquired title to property in Charlevoix. They held the property as “tenants by the entirety” which is a form of joint ownership in Michigan applicable only to married couples. Dona then conveyed her interest to her husband James, who in turn as sole owner, conveyed the property to himself and his son Nathan as joint tenants with rights of survivorship. James died in January, 2005 which automatically made Nathan the sole owner. On September 10, 2005, Nathan conveyed the property to himself and his brother as joint tenants with rights of survivorship (“joint tenants with rights of survivorship” simply means that upon the death of one of the joint owners, the remaining joint owner(s) are automatically deemed to own the property as a matter of law; there is no new deed or new conveyance).

In 2006, the assessor for the City of Charlevoix determined that the death of James in 2005 constituted a conveyance to Nathan and uncapped the property taxes, resulting in a new taxable value that was almost double the previous taxable value. Nathan appealed the assessor’s determination to the local board of review which upheld the decision of the assessor. Nathan appealed that decision to the Michigan Tax Tribunal which upheld the decision of the board of review. Nathan appealed that decision to the Michigan Court of Appeals.

In an opinion rendered on December 15, 2009, the Michigan Court of Appeals reversed the decision of the Michigan Tax Tribunal, finding that the transfer that occurred as a result of the death of James (making Nathan the sole owner) did not constitute a transfer of ownership under the Act. As a result, the taxes should not have been uncapped. The court came to this conclusion based upon the wording of the Act which requires a “conveyance.” Because the Act does not define “conveyance,” the court, considering both legal and dictionary definitions, determined that a “conveyance” is an instrument in writing affecting title to real property. The court ruled that the death of James, which automatically vested sole ownership in Nathan as the surviving joint tenant, was not a conveyance. The assessor has appealed that decision to the Michigan Supreme Court which, just a few weeks ago, agreed to take the case.

So, why is this case important? Plummeting property values equate to lower property taxes and lower tax revenues. If taxable values can be uncapped, revenues will increase. This case, which focused solely on whether or not the death of a joint owner constitutes a transfer of ownership such as to allow for the uncapping of property taxes, is therefore of substantial importance to property owners and assessors alike. A decision is expected later this year.

Dan A. Penning