What Qualifies as a Principal Residence?

This is probably one of the most frequently asked questions I encounter.

A "principal residence" is defined by section 7dd(c) of the Michigan General Property Tax Act,MCL 211.7dd(c), as follows:

"Principal residence" means the 1 place where an owner of the property has his or her true, fixed, and permanent home to which, whenever absent, he or she intends to return and that shall continue as a principal residence until another principal residence is established.

Not very legalistic, is it? Your principle residence is the the one true home you return to whenever you are away. If you can prove that your property serves as your principle residence, then you may be entitled to a personal residence exemption which would exempt you from property taxes levied by a local school district for operating purposes.

Michigan Property Transfer Tax Relief

Attorney General Mike Cox has issued an opinion which should afford some Michigan home sellers a certain measure of relief in this difficult real estate environment of declining market values.

The Attorney General's opinion deals with an obscure provision in the General Property Tax Act, MCL 207.526(t), which exempts from a seller from paying state transfer tax provided the following requirements are met:

(a) The property must have been occupied as a principal residence, classified as exempt from taxes for school operating purposes under MCL 211.7cc;

(b) The property's SEV for the calendar year in which the transfer is made must be less than or equal to the property's SEV for the calendar year in which the transferor acquired the property; and

(c) The property cannot be transferred for a consideration exceeding its true cash value for the year of transfer.

In his opinion, the Attorney General provides hypothetical examples to help illustrate how the exemption is to be applied under commonly arising factual scenarios. The examples assume that a husband and wife purchased or acquired real property in 2006, occupied the property as their principal residence, and conveyed the parcel to another person in 2008.

EXAMPLE 1:

SEV when acquired in 2006 = $74,000.00.

SEV when transferred in 2008 = $72,000.00.

TCV in 2008 = $144,000.00.

Transfer or sale price in 2008 = $140,000.00.

OUTCOME: This transfer qualifies for exemption from the state real estate transfer tax because the SEV for 2008, the year of sale, is less than the SEV for 2006, the year of acquisition, and the sale price does not exceed the true cash value.

EXAMPLE 2:

SEV when acquired in 2006 = $74,000.00.

SEV when transferred in 2008 = $72,000.00.

TCV in 2008 = $144,000.00.

Transfer or sale price in 2008 = $148,000.00.

OUTCOME: This transfer is not exempt under MCL 207.526(t) because the sale price exceeds the true cash value for 2008, the year of sale.

EXAMPLE 3:

SEV when acquired in 2006 = $74,000.

SEV when sold in 2008 = $75,000.

OUTCOME: This transfer, regardless of the sale price, is not exempt under MCL 207.526(t) because the SEV for 2008, the year of sale, exceeds the SEV for 2006, the year of acquisition.

How much money could this save you? The state transfer tax is $3.75 for each $500.00or fraction of $500.00 of the total value of the interests in real property being transferred. MCL 207.525. (This equates to approximately ¾ of 1% of the value of the property.)

Michigan Property Tax Relief

If you have purchased a new home in Michigan and are still sitting on another Michigan home which you cannot sell in this market, you may be able take advantage of legislation passed earlier this year. Under the new law, a seller can retain an additional personal residence exemption (previously knows as the homestead exemption) for up to three years on property previously exempt as the owner's principal residence if the property is not occupied, is for sale, is not leased, and is not used for any business or commercial purpose. Property qualifying for a personal residence exemption is exempt from the 18 mill tax levied by local school districts for school operating purposes.
MCL 211.7cc

Has the Real Estate Market Hit Bottom?

This intriguing question is the headline of Petoskey News Review Reporter Steve Zucker's recent article on the Northern Michigan real estate market.

While I wouldn't presume to know the answer to this question, some statistics I researched for this story show the extent to which our real estate market has weakened over the past several years.

Almost thirty percent of sales involving single family homes in the Petoskey, Harbor Springs, Boyne City and Charlevoix school districts from January 1, 2008 through September 1, 2008 were bank owned foreclosures. The number of foreclosure sales this year is up almost 500% from the same period in 2006, just two short years ago.

For the months of January through August of this year, there were 359 unit sales of homes and condominiums in the Petoskey, Harbor Springs, Boyne City and Charlevoix real estate markets, with the dollar volume of sales totalling $114,417,285, and a median sales price of $170,000.

While we may not know whether we have reached the bottom, it looks like our most recent residential market top was in 2004. From January through August of 2004, there were 536 unit sales of homes and condominiums in the Petoskey, Harbor Springs, Boyne City and Charlevoix real estate markets, with the dollar volume of sales totalling $150,604,789, and a median sales price of $192,200.

Comparing this year's sales numbers with 2004, our unit sales volume is down over 33%, our dollar volume of sales is down almost 25%, and our median sales price is down almost 12%.

According to some industry observers, subprime mortgage delinquencies appear to have peaked in December of 2007, and subprime mortgage foreclosure starts may have peaked in January of 2008. This could indicate that the flood of bank owned properties into our market may soon be nearing a peak. However, there is concern that we have not yet reached a peak in Alt-A mortgage delinquencies.

I don't beleive that we will see a meaningful improvement in our local real estate market until the overhang of bank owned properties works its way through the system, which is currently in progress. However, with so much bad news already behind us, I am cautiously optimistic that we are beginning to see some light at the end of the tunnel. Hopefully it isn't a freight train!