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Blogs | July 9, 2015
3 minute read

MSC resurrects real estate transfer tax exemption for homeowners

Many who sold their homes in the last four years are now entitled to a refund of transfer taxes from the Michigan Department of Treasury, thanks to the Michigan Supreme Court’s decision today in Gardner v Dep't of Treasury, Nos. 150293-5.  Like the Petitioners in this case, many homeowners paid transfer taxes to the state during the recession, not realizing they were exempt under Section 6 of the State Real Estate Transfer Tax Act.  The statute exempts homeowners from transfer tax when (1) the principal residence exemption was claimed under MCL 211.7cc, and (2) the state equalized value (SEV) of the property at the time of sale was equal to, or less than, the SEV at the time of purchase.  That same statutory section, however, contains an exception to this exemption stating the seller will have to pay the tax (and potentially a 20% penalty) if "the sale or transfer of property is found by the treasurer to be at a value other than the true cash value."  In September of last year, the Court of Appeals interpreted this last provision to mean that the home must be sold for exactly twice the then-current SEV, making the exemption so narrow it would practically never apply.  The Michigan Supreme Court reversed, holding that it does not matter what price the home sells for, as long as it is a price that a willing buyer and seller would arrive at in an arm's length transaction.

Petitioners in this case all sold their homes at a time when the SEV was lower than when they purchased it, but paid the real estate transfer tax.  When they requested a refund, the Department of Treasury, relying on an earlier opinion from the Attorney General, denied the exemption on the basis that these homeowners had sold their property for more than the current “true cash value” as determined by the local tax assessor in the current property tax year.  In a published majority opinion, the Court of Appeals went even further and held that the exemption was properly denied because the property did not sell for “exactly” twice the then-current SEV, i.e., the local assessor’s current true cash value determination.  In other words, even if the property sold at a significant loss and for substantially less than the assessor’s valuation, no exemption could be granted; the transfer tax would apply. 

In a per curiam opinion, the Michigan Supreme Court reversed the Court of Appeals interpretation and also rejected the Department of Treasury’s alternate interpretation. The Michigan Supreme Court instead held that “[t]o be entitled to the transfer tax exemption under MCL 207.526(u), the petitioning taxpayer need only demonstrate that the property at issue is the principal residence of the seller or transferor, that it has an SEV at the time of conveyance that is less than or equal to the SEV at the time of acquisition, and that it was sold or transferred for a price at which a willing buyer and a willing seller would arrive through arm’s-length negotiation.”  It did not matter in this case that the properties sold for more than twice the then-current SEV, or even that they sold for more than twice the SEV when they purchased the property.  “[A]ll that need be shown in this regard is that the SEV be the same or lower at the time of sale than when the property was first acquired.”  Accordingly, it ordered reinstatement of the Tax Tribunal's judgment in favor of the taxpayers.

Disclaimer:  Warner's Appellate and Supreme Court Practice Group represented the prevailing taxpayers in this Michigan Supreme Court appeal.