Avoid Tax Surprises: What Every Michigan Homebuyer Needs to Know
Buying a home is a big deal—and it comes with a lot to learn. From figuring out escrow to understanding SEV, there’s definitely a learning curve. And just when you’re getting the hang of it, someone mentions “uncapping taxes.” While it might sound complicated, it’s really just another important consideration for homebuyers. With the right guidance and preparation, it’s easy to manage and plan for.
Let’s dive into what uncapping taxes means, how it impacts your budget, and how you can use local resources, including your lender and realtor, to prepare.
What Does “Uncapping Taxes” Mean?
In Michigan, property taxes are governed by Proposal A, a state amendment that limits the annual increase of a property’s taxable value to the lesser of 5% or the rate of inflation. However, when a property is sold, its taxable value “uncaps,” resetting to the state equalized value (SEV), which represents 50% of the property’s market value.
For many new homeowners, this means their property taxes will increase significantly in the second year of ownership as the taxable value adjusts to match the SEV. This can lead to unexpected financial strain if not accounted for during the home-buying process.
Can Taxes Uncap Sooner?
While uncapping typically impacts the second year of ownership, there are scenarios where it can occur earlier. These include:
1. Partial-Year Ownership: If a home is sold early in the year, the uncapping may be reflected on the current year’s tax bill rather than the next.
2. Changes in Property Use: If a property is converted to commercial use or from a rental to a primary residence, immediate reassessment may occur.
3. Incorrect PRE Status: If the prior owner improperly claimed the property as their primary residence, taxes may be adjusted retroactively upon sale.
4. New Construction or Substantial Improvements: Additions, renovations, or completing new construction may prompt reassessment before the typical schedule.
5. Land Divisions or Lot Splits: Properties involved in a lot split or land division are typically reassessed immediately.
How to Prepare for Early Uncapping
To avoid surprises, here are steps you can take to prepare for potential early uncapping:
- Check with the Assessor: Verify the property’s taxable value and ask about any pending adjustments.
- Ask About PRE Status: Ensure the seller’s use of the property was compliant to avoid unexpected tax increases.
- Understand Property History: Be aware of recent improvements, changes in use, or any legal proceedings that might impact taxes.
- Work with Professionals: Your lender and realtor can provide guidance specific to your situation and help you anticipate any immediate changes.
To make this easier, we’ve compiled links to the top 25 assessor’s offices in West Michigan, focusing on townships experiencing the most residential growth within a 30-mile radius of Grand Rapids:
☆ Grand Rapids Charter Township Assessor
☆ Plainfield Charter Township Assessor
☆ Cascade Charter Township Assessor
☆ Allendale Charter Township Assessor
☆ Gaines Charter Township Assessor
☆ Lowell Charter Township Assessor
☆ Georgetown Township Assessor
☆ Hudsonville Assessor’s Office
☆ Zeeland Charter Township Assessor
☆ Holland Charter Township Assessor
☆ Tallmadge Charter Township Assessor
How to Anticipate Year Two Taxes
While the tax increase doesn’t occur until the second year, you don’t have to wait to plan for it. Here are steps you can take:
1. Research the Current SEV and Taxable Value
o These values are found on the property’s tax bill or through the local assessor’s office. The taxable value is likely lower than the SEV if the home hasn’t changed ownership in many years.
2. Estimate Future Taxes
o Use the SEV and local millage rate to calculate your future tax bill. Multiply the SEV by the millage rate and divide by 1,000 (since a mill represents one-tenth of a cent). For example:
If the SEV is $150,000 and the millage rate is 40 mills:
3. Leverage Online Tools
o Resources like the Michigan Property Tax Estimator make it easy to estimate your taxes based on local rates.
4. Consult Your Lender and Realtor
o Your lender should provide projections for your first-year taxes and estimated taxes in year two when the uncapping occurs. Your realtor can guide you to accurate resources and help explain how uncapping affects homes you’re considering.
Filing for Homestead Exemption
If your home is your primary residence, filing for the Principal Residence Exemption (PRE) can reduce your property tax bill by exempting you from school operating taxes, typically 18 mills.
- When to File: Submit the PRE form to your local assessor’s office by May 1 to apply the exemption to the current tax year.
- Why It Matters: If the previous owner did not use the property as their primary residence, you’ll pay higher taxes until the exemption is filed.
The Impact of Planning (and Not Planning)
Case 1: Caught Off Guard
Sam, a first-time buyer, purchased a home in Rockford with a taxable value of $85,000. The seller had owned the home for 20 years, keeping the taxable value capped while property values rose. In their first year, Sam’s taxes were $3,400—affordable and within budget. But the second year brought an unpleasant surprise: their taxes doubled to $6,800 as the taxable value uncapped. Without consulting their lender or realtor for projections, Sam was unprepared for the financial impact and struggled to cover the unexpected cost.
Case 2: Knowledge is Power
Jack and Olivia, purchasing a home in Belmont, worked closely with their lender and realtor. Their lender provided detailed projections for both the first-year taxes and the uncapped taxes in year two. Armed with this information, they adjusted their budget to ensure long-term affordability and set aside extra savings during their first year to cover the increase. Thanks to their preparation, they transitioned smoothly into homeownership without any financial surprises.
Key Takeaways
1. Understand Uncapping Taxes: Know that property taxes reset to the SEV in the second year of ownership, or sooner in specific cases.
2. Plan for the Increase: Use online tools, your lender, and your realtor to estimate your future tax bill.
3. File for Homestead Exemption: Don’t miss the May 1 deadline to lower your tax liability.
4. Budget Accordingly: Adjust your home search budget and save during the first year to cover the increase.
Have Questions About Property Taxes?
Property taxes might not be the most exciting part of homeownership, but they don’t have to be intimidating. With a little know-how and the right team, you’ll feel confident tackling them head-on. Got questions about buying a home, or property taxes specifically? Let’s chat—We're here to make the process as smooth as possible.