Happy holiday season everyone! We are only one month away from the best day of the year! Christmas? New Years? No. Property Assessment Day (December 31st). For all you new homeowners, this will be your new favorite day of the year. Okay, not really. Probably far from it. Why is this day so important? It’s the day that your property’s value is reassessed to determine your next year’s property taxes. It’s specifically relevant to new homeowners who have bought a house in this calendar year. 

In the awesome state of Michigan, we have what’s called “Proposal A”. Among other things, this tax proposal establishes the framework for how property values are assessed and taxes determined. In a nutshell, it gives established homeowners a limit for how much their home’s ‘taxable value’ can increase from year to year. This “cap” is regulated at an increase of 5% or the rate of inflation, whichever is less. However, if you buy a house, this “cap” is lifted and your taxable value gets increased all the way up to equal the ‘assessed value’ (your assessed value is 50% of your house’s market value)

What does all of this mean? Example: A person buys a house in 2015 for $100k. The assessed value is now at $50k and the taxable value is also at $50k. 

After 6 years of ownership, their house’s market value is now $180k ($90k assessed value). But because of the taxable value increase being capped at 5%, the taxable value has only gone up to $134k (divided by 2 to get a $67k taxable value). There’s a value gap of $23k they aren’t paying taxes on.

They then decide to sell the house to you in 2021 for $180k. The first year you bought the house, everything was wonderful as your tax bill was based on the previous owner’s taxable value of $67k. However, on December 31st, 2021 your home was reassessed and the taxable value was uncapped for the next year and goes all the way up to match the full $90k assessed value. Oh no, the gap was completely closed.

With the taxable value going way up, this means that the amount you pay in taxes could increase by a few hundred dollars a month! Without you even realizing why or how…

How do you plan for this as a home buyer? There are a few steps that can be taken:

Step 1) Read the documents you’re signing when you buy a house. The Seller’s Disclosure Statement specifically states “BUYER SHOULD NOT ASSUME THAT BUYER’S FUTURE TAX BILLS ON THE PROPERTY WILL BE THE SAME AS THE SELLER’S PRESENT TAX BILLS. UNDER MICHIGAN LAW, REAL PROPERTY TAX OBLIGATIONS CAN CHANGE SIGNIFICANTLY WHEN PROPERTY IS TRANSFERRED”. This is located directly above where you, as the buyer, signs. 

Step 2) Your home buying agent has to educate you when you’re going through the process. Talk with your agent and have them guide you through understanding this, as related to your specific circumstances. Note for agents: We owe it to our clients to help them understand all the different variables of buying and owning a house; to help them better prepare for the road ahead. Even if those variables are outside of our control. 

Step 3) Go to the State of Michigan Property Tax Estimator. Located at michigan.gov/taxes/property/estimator. Here, you can plug in the SEV of the house you’re looking to buy (half the estimated purchase price). Input the county, then city/township, followed by the school district. This will calculate the millage rates for that area and estimate an annual tax amount that you might pay. Divide that number by 12 to get an estimated monthly tax amount.  

Step 4) If taxes are held in escrow by your lender, check with them to see if they are preparing for this increase in monthly property taxes. Some do but in most cases, they are only basing your monthly payment off of the current property taxes. Once the increase in property taxes occurs, they will notify you saying that your total monthly payment is going up. 

Whether you’re a long time homeowner or a first time home buyer, this is an often overlooked aspect when heading into the homebuying process. If you’re planning to buy a home, please plan accordingly so you’re not surprised by the sudden increase in property taxes. Also, please share this with someone you know who has purchased a home this year, as they can better prepare for the ensuing tax increase.

If you have any questions or need assistance with any real estate matters, I am here to help! 

Thanks for reading.

Nick Scherba

American Associate Realtors

810-429-2341

scherbasold.com