Did you know your property taxes can (and mostly likely will) increase the year following the purchase of your new home?

In Michigan, a property’s taxable value will increase from one year to the next by the rate of inflation or 5%, whichever is less, until ownership of the property is transferred. Once ownership is transferred, the property’s taxable value is uncapped and will increase to the same level as the assessed value the year following the sale. In most cases, buyers will see a substantial increase in property taxes depending on the gap between the taxable value and the assessed value of the property.

Why are property taxes uncapped following a transfer of ownership?

In 1994, Michigan Voters passed Proposal A, which limits the growth in property taxes to the rate of inflation or 5%, whichever is less, but only until ownership of the property is transferred. Once ownership is transferred, the property’s taxable value is uncapped and increases to the same level as the assessed value in the year following the sale.

The formula under Proposal A ensures a property’s taxable value does not grow as fast as the property’s assessed value, which should be at or near 50% of market value. However, once the property is sold, the taxable value is uncapped and increases to the assessed value for the year following the sale.

For example, a new home is purchased for $200,000 (market value). The assessed value is $100,000 (50% of market value) and the taxable value is $75,000. The gap between the assessed value and the taxable value depends on how long someone has owned the property. Taxes for Southfield (Southfield Public Schools) are 0.064 mills, equaling $4,800 in taxes.

A study of sales in the neighborhood shows the market value of similar properties is $210,000, increasing the market value of the property. The assessed value increases to $105,000 (50% of market value) and the taxable value is uncapped and jumps to $105,000 in the year following the transfer of ownership. With the same millage rate of 0.064 mills, taxes will increase to $6,720 in the year following the sale of the property.
 

The example above is used as a simplified illustration of how property taxes can increase for the year following the purchase of the property.

How are property taxes calculated?

Property taxes are calculated by taking the taxable value of the property, which is approximately half of what the property is worth, and multiplying it by the number of mills imposed by local authorities.
 

Interested homebuyers can contact the City of Southfield Assessing Department prior to closing on a property for more information on how the uncapped value of the property will affect taxes.