Property Taxes on A Foreclosure
Buying A Foreclosure in Michigan? Beware of The Big Bad Tax Bite!
WHEN BUYING A FORECLOSURE IN MICHIGAN UNDERSTANDING HOW YOUR PROPERTY TAXES WILL BE COMPUTED IS CRITICAL!
When buying a foreclosure in Michigan, if you assume your property taxes will be based on the price you paid for the home you'll be in for a big shock. Your taxes will very likely be based on a figure that has no relationship to the current market value, let alone the sale price. It's called the SEV, which stands for State Equalized Value. And it can easily be twice the actual sale price of the home.
HOW CAN THIS HAPPEN? YOU ASK....
Back in 1994 when homeowners were losing their homes to tax sale because our property tax structure was completely out of control, the Headlee Amendment, also known as Proposal A, passed. It stopped the double digit escalation of assessments and capped the taxable value of every home in Michigan at its 1994 value. After that, the assessors could only raise your taxable value no more than 5% or the rate of inflation, whichever was less. Inflation has been running about 3%. So that's how much your taxable value goes up every year...... no matter what. The Headlee Amendment (Proposal A) also said when a home sold, the cap came off, and the new taxable value was always the sale price.
WHAT IS THE DREADED "SEV" ANYWAY?
That was then. This is now. For the first time in history, homes in Michigan are selling below SEV. And what is SEV anyway? Sate Equalized Value. That's the figure they think your home is REALY worth....but they can't tax you on. It's what you USED to be taxed on before the Headllee Amendment came along. So now you see two figures on your tax bill. The SEV, (the figure the assessor thinks your home is REALLY worth), and the Taxable Value, which is the lower figure they're stuck with using to base your taxes on.
THE MARKET GOES SOUTH AND THE ASSESSOR GETS CREATIVE
So when homes suddenly started selling for less than SEV, the assessors went back and dusted off that Headlee Amendment and discovered a wonderful loophole. It said when a home sells and the cap comes off, assessors are free to choose EITHER the sale price OR the SEV. Not whichever is higher, or lower, Just pick one! So....since homes are selling for below SEV...and the townships and cities are broke...they're choosing the SEV instead of the sale price as the new taxable value. Because they can!
BUT I CAN APPEAL MY TAX ASSESSMENT....RIGHT?
Buyers who get a bargain on a foreclosure are in for a shock when they get their tax bill and find it's based on a figure that can be twice as much as they actually paid for the home! So they appeal to their local Board of Review and for many reasons I won't bore you with here, they deny it. (Some are their fault...some are the way the state forces them to work with formulas). The good news is you can appeal to the State Tax Tribunal, and they will find in your favor. The bad news is, as a result of this problem affecting just about every buyer in the state, the tribunal has around a 3 year waiting list!
So, understandably, taxpayers are storming Lansing with torches over this, and our diligent lawmakers are "working on" revising the law. But who knows how long that will take. After all...it's our government we're talking about here. And the longer they take to fix it, the longer the local governments can collect these artificially high taxes, which gets the state off to hook to send them more money. Recently some local assessors, bowing to public pressure, have reduced SEV's a bit across the board in their communites. But it's not nearly enough to equal what many of these foreclosures are selling for.
So......until this mess is fixed, I warn my clients...you will get a great deal on a home...but be prepared to pay a tax bill that bears no relationship to what you actually paid for the house.... for a while anyway.
LET'S JUST COMPLICATE IT FURTHER WITH "HOMESTEAD" vs. "NON-HOMESTEAD" STATUS
With regard to "homestead exempt" versus "non-homestead" tax status. When the Headlee Amendment passed, and the school tax was removed from homes, they had to figure out a way to get it back. (Of course!) So they hiked the sales tax from 4% to 6% and they said the school tax will only be removed form the home you actually live in. That one is "homestead exempt". Second homes, rentals, vacant homes and commercial will be "non-homestead" and will pay an extra 18 mils for schools. (That's $18 per thousand of taxable value). How do you know if a property on the MLS is "homestead exempt"? On the listing there will either be a "Y" or an "N" next to the word "Homestead". Depending on the local millage, non-homestead status can raise your taxes 40% to 100%. Example; City of Howell millage is about 47. So adding 18 mils raises it about 40%. But Cohoctah Twp millage is only about 22. So adding 18 mils there nearly doubles your taxes.
BE ON THE LOOKOUT.....ASSESSORS ON THE PROWL!
Since some owners have already moved, and of course all foreclosures are vacant, AND the townships are broke, the assessors are on the prowl looking for vacant homes so they can change them from homestead to non-homestead status and get more tax dollars. When the home sells, if the new owners will be using it as their principal residence, it will change back to homestead status. That's the good news. The bad news is that the state is not known for speed and efficiency. And remember, the Headlee Amendment (Proposal A) is a state law, not a local law. So the state said "We're tired of recording all these changes every time a home sells. Too much like work. So, we don't care when a home sells and the status changes, we're only going to record it once a year. And that date is May 1st"
So, if you buy a non-homestead status home and close after May 1st 2008, (which clearly you will now) and change its status from non-homestead to homestead, the change will not take effect until May 1st 2009. And you're stuck paying those artificially high taxes for nearly a whole year. Buyers need to close no later than April 30th to make the recording deadline for the change from non-homestead to homestead. Since clearly May 1st has come and gone, the best you can do now is go to the seller and ask for concessions to cover those high taxes for the coming year until the new status is recorded. Sometimes they'll grant them, sometimes they won't. But remember, that's a NORMAL seller we're talking about. In the case of foreclosures and short sales, the banks could care less, so they will most likely not give you tax concessions. As a result, it's important to know exactly what the tax implications are on a foreclosure or short sale before making an offer.
HOW DO I FIGURE OUT WHAT MY TAXES ARE GOING TO BE?
To determine what your property taxes will be, go to the State of Michigan website and enter the current SEV on the home as the taxable value. It will show what the homestead and non-homestead rate would be. Just click here to acces the page.
