Buyers in Michigan are often surprised by their second year of property taxes. The tax bill the seller showed you can be much lower than what you will pay. The reason is a single word in Michigan tax law: uncapping.
Three values on every assessment
Your city or township assessor tracks three numbers for every home.
- Assessed value is half of the assessor's estimate of market value.
- State equalized value (SEV) is the assessed value after the county and state review it. For most homes it equals the assessed value.
- Taxable value is the number your taxes are calculated from.
Proposal A caps the increases
Since Michigan voters passed Proposal A in 1994, a home's taxable value can rise each year by no more than the rate of inflation or 5 percent, whichever is less, while the owner keeps the home. Its SEV can rise faster. So the longer someone owns a home in a rising market, the further their taxable value falls below the SEV.
A sale lifts the cap
When the home transfers to a new owner, its taxable value "uncaps" on December 31 of that year. The next year, taxable value is reset to the SEV, and the cap starts again from there.
An illustration: a home has an SEV of $175,000 and a taxable value of $110,000 after years of capped increases. The seller's taxes are calculated on $110,000. After you buy it, your taxable value becomes $175,000, and your taxes are calculated on that. If the local rate were 40 mills, the seller paid about $4,400 a year, and you would pay about $7,000.
The numbers above are an example, not a quote. Millage rates differ from city to city and from school district to school district.
How to estimate your taxes before you buy
- Find the home's current SEV. It is on the assessment notice, and many communities publish it online with the parcel record.
- Find the total millage rate where the home sits, and whether it includes school operating mills.
- Multiply the SEV by the millage rate and divide by 1,000. If you will live in the home and claim the Principal Residence Exemption, take off up to 18 mills of school operating tax.
Your agent can pull these for any home you are serious about. Your lender will also estimate taxes for your escrow account, but ask them to use the uncapped value.
Claim the Principal Residence Exemption
The Principal Residence Exemption (PRE) exempts your home from up to 18 mills of local school operating taxes. It does not apply automatically. File Form 2368 with your city or township, usually by June 1 or November 1, to have it apply to the summer or winter bill. Many title companies hand you the form at closing.
The short version
Do not budget from the seller's tax bill. Budget from the SEV and the local millage rate, and file your PRE as soon as you close. If you are looking for a home, tell us the cities and price range and your Raven agent will run the numbers on every home you consider.