It’s All in the Paperwork

Homeowner calculating principal residence exemption

Michigan homeowners can claim an exemption on the property taxes levied against their primary residence. The size of the exemption is not insignificant. If the “taxable value” on your notice of assessment is $150,000, for example, the “principal residence exemption” (PRE) can mean a tax savings of about $2,700 a year.

In order to qualify for the PRE, an individual must both own and occupy the home as his or her primary residence. But what happens when someone else is also living in the house? The answer depends on that person’s status.

If a homeowner rents out 50% or more of the square footage of the house, the PRE will be lost. On the other hand, if a homeowner rents out a bedroom but gives the renter access to the common areas of the house, the PRE will be preserved. The Michigan Court of Appeals recently differentiated between the two arrangements, opining that an individual who rents a room in the house but is given access to common areas has been granted merely a license to use those common areas, not a lease to use and possess them.

Many people rent out rooms in their homes. Perhaps having a roommate makes the home more affordable for the homeowner. Or, perhaps having a roommate enables an older homeowner to remain independent for a longer period of time. Either way, the key to preserving the homeowner’s PRE is to properly structure the arrangement. And the key to proper structuring is in the paperwork. If you are considering renting out space in your home, please call us at (248) 477-6300.

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