Michigan Supreme Court’s SEV ruling may result in refunds
Law firm wins fight regarding Real Estate Transfer Tax Act.
Attorneys from Warner Norcross succeeded in July in having the interpretation of a statute in the Real Estate Transfer Tax Act overturned by the Michigan Supreme Court.
Gaëtan Gerville-Réache, an attorney with Warner Norcross, explained that whenever someone records a conveyance with the register of deeds, that person or entity is required to pay a tax in the amount of three-quarters of 1 percent of the value of the property.
There are a number of exemptions, however.
The case Warner took on dealt with the principal residence exemption.
“Most people get an exemption from certain annual property taxes for their principal residence — their home,” Gerville-Réache said. “If you claim that exemption, and you sell that home when its SEV is equal to or less than the SEV when you purchased it, you might also be exempt from the transfer tax.”
To qualify for the exemption, the state equalized value, or SEV, at the time of purchase has to have been equal to or higher than the state equalized value at the time of sale.
“The idea is to give people a tax break in a stagnant or depressed housing market,” Gerville-Réache said.
He said typically the SEV goes up each year, which means in a depressed housing market many people would qualify for the transfer tax exemption, unless the Michigan Treasury Department determines the house sold for something other than true cash value.
“The true cash value is what the assessor uses to determine what your SEV will be,” Gerville-Réache said. “Sometimes the county or state equalizes that and makes an additional adjustment.”
In 2008, Gerville-Reache said, Michigan’s attorney general came out with an opinion that the exception to the exemption means someone could only claim the exemption when the property sold for a price that was less than twice the state’s equalized value because the SEV is half the true cash value.
“Basically, if you sell the property for less than the true cash value as determined by the local assessor that year, then you can claim the exemption. It was an additional condition on getting this exemption,” Gerville-Réache said.
Warner’s clients in the case had sold their houses for more than what the local assessor determined to be the true cash value for that year, but the SEV was lower than when they purchased it. That meant the clients did not meet the attorney general’s interpretation of the statute, which had added an additional condition for getting the exemption.
The case went to the Court of Appeals, which Gerville-Réache said took the interpretation even further, saying the only time someone could be qualified for the exemption was if the house sold for exactly twice the SEV for that year, not a dollar more or less.
“As you can imagine that practically never happens,” he said.
He said the Court of Appeals reached its conclusion because it said the true cash value was based on the determination of the local assessor.
“We took the position that that is not what the statute means,” Gerville-Réache said. “Nowhere in the statute does it say the true cash value is what the assessor says it was for purposes of the general property tax.”
He said the classic definition of true cash value has always been market value, or “the price which a willing buyer and seller would negotiate at an arm’s length transaction for the house.”
An “arm’s length transaction” is one in which the buyer and seller act independently and have no relationship to each other.
The Michigan Supreme Court agreed with Warner’s clients and adopted the law firm’s position on the exemption requirements.
Gerville-Réache said the decision is important because following the Court of Appeals interpretation “no one was probably going to be entitled to the exemption.” He said the attorney general’s interpretation had limited who would qualify more broadly than what previously had been allowed.
“The exemption will apply to a broader class of home sellers than it did before,” he said.
“I would expect if the house sells for something close to twice the SEV in that year, it’s going to be hard to say it’s not fair market value because the local assessor has already come up with a similar figure.”
Additionally, if someone paid a transfer tax in the last four months, that person may be entitled to a refund in light of the Supreme Court’s decision.
“There may be a lot of people claiming a refund as a result of this,” Gerville-Réache said.
Going forward, Gerville-Réache noted the Michigan Treasury Department may look more closely at home sales that depart significantly from the true cash value determination made by the assessor in that year, and sellers need to be able to show that the property was sold in an arm’s length transaction, although it’s still unclear when and how they will be required to do that.