Since 1995, the amount by which Michigan real property taxes can increase each year has been capped at the lesser of five percent or the rate of inflation. This cap on property taxes comes off, however, whenever there is a “transfer of ownership.” The result is that, when property has increased in value over the years and is then transferred, the property taxes will be stepped up to reflect the current market value. This hike in taxes can have a tremendous impact, particularly on waterfront and vacation homes whose market value may have increased many times their purchase price.

Fortunately, a number of conveyances are not treated as “transfers of ownership,” meaning that they do not result in the uncapping of property taxes. Among them, transfers between spouses, transfers to some trusts and transfers creating or ending certain forms of joint ownership. Noticeably absent from this list of exclusions, however, has been the transfer of a residence to one’s children. For the last 19 years, whenever a parent transferred a home to a child, the property taxes have become uncapped.

The uncapping of taxes upon the lifetime transfer from a parent to a child ceased as of December 31, 2013. Michigan now has a new law, which says a “transfer of ownership” will not include “a transfer of residential real property if the transferee is related to the transferor by blood or affinity to the first degree and the use of the residential real property does not change following the transfer.”

This is generally great news for parents and children, but it leaves much uncertainty for others as the new law fails to define “blood or affinity of the first degree.” The State Tax Commission has issued a bulletin stating what it considers to be a first-degree blood or affinity relationship, but the bulletin is not entirely clear and does not have the force of law.

The new law has other shortcomings, such as the failure to include transfers from a parent’s estate or trust to the parent’s children, or transfers to sons-in-law and daughters-in-law. We are hopeful that the Michigan legislature will soon address these shortcomings. In the meantime, some transfers can be structured in two steps in order to meet the “blood or affinity to the first degree” requirement. Others are best postponed until we know more about how the new law will be interpreted. In all cases, it is wise to seek legal counsel.