07.30.09
Proposal A Illustration
Are you thinking about transferring a parcel of real estate from yourself to yourself and another as tenants-in-common (not as joint tenants)? If the parcel is in Michigan, you’re going to face an anomalous property tax result.
Under 1994’s Proposal A, all property values for purposes of taxation became subject to a limit: they could only go up the rate of inflation or 5%, whichever is less. Prop A also provided, though, that when a piece of property is transferred, the limit (the “cap”) comes off, with the result that the parcel is then valued (for purposes of taxation) at its then-fair market value.
If you transfer a parcel into a tenancy-in-common, retaining one-half for yourself, you are essentially transferring one-half of the parcel, with the result that one-half of the cap should come off. Example:
Parcel’s Current Fair Market Value: $90,000.00
Parcel’s Current Taxable Value: $50,000.00
Parcel’s New Taxable Value: $70,000.00 ($25,000 original one-half + $45,000 uncapped one-half).
The resulting tax hit? It’s impossible to say. To figure it out, you need to multiply your tax jurisdiction’s mills by 70 and contrast it with the old tax hit.
Salient observations from the Business Law Prof Blog: “Anyone with any doubt over whether governments will inject political considerations in deals affecting government owned operating companies should take a close look at the Opel sale. GM, with its majority owned the United States government, is attempting to sell its Opel division, a major manufacturer in Germany and other European countries. The German government is willing to help finance the sale. There are at least three potential buyers: 1) A Chinese company that probably will pay the most and require the least subsidy; 2) A private equity company with a major United States investor that will pay royalties for intellectual property after the deal; and 3) A Canadian-Austrian automotive supplier (operating company) that probably will pay the least. Who is the front runner for the deal? 3, the operating company. Why? The German government, going into an election, is anxious to keep German plants open (the Canadian-Austrain company is the most likely to do so) and German officials up for re-election has been basing private equity companies and Chinese buyers. The United States government does not want to “upset” a close ally when seeking more help in Afghanistan. If GM wants to maximze the returns for its taxpayers/owners it would sell to China. No chance. GM will take the hit. When government owns businesses, investor welfare is easily and quickly sacrificed for political goals.”
