Eight years after Proposal A limited property assessment increases, some Michigan home buyers are suffering tax shock when they move to another home.
They didn’t know the cap on property assessments vanishes when they buy a home, or how much that affects property taxes.
In February, Dorothy Papajohn of Royal Oak was stunned by a whopping 54 percent increase in the assessment on the modest house she bought in 2001. The assessment rose from $54,200 for the previous owner to more than $83,000 for Papajohn.
“I thought, whoa, this must be a typo,” she said. “But it wasn’t.”
In fact, protecting people from being taxed out of their homes was just what the authors of Proposal A had in mind when they presented it to voters. But years later, the disparities in tax payments caused by the law have become clearer.
Papajohn’s appeal to a local review board reduced the assessment to $80,000. Still, she must pay $2,834 in property taxes this year — about $900 more than the home’s last owner paid. Assessments are 50 percent of a home’s assessed market value and are used to calculate property taxes.
“This is an added burden, but I’ll deal with it,” Papajohn said. “A couple of people told me, `Didn’t you know the law?’ Well, I didn’t.”
Papajohn’s experience underscores a hidden consequence of Proposal A, the landmark school tax reform approved by voters in 1994. Assessment shock is a factor that assessors say is little understood by many home buyers and often not well explained by real-estate agents.
“Real-estate people don’t tell them because they don’t want to lose a sale,” said Mary Ellen Soma, Royal Oak’s acting assessor. “I know of some cases where people are told there would be no change in taxes.”
A good agent representing home buyers tells clients what will happen with their property taxes before they bid on a home, said Robert Taylor Jr., a Birmingham Realtor.
Proposal A slashed school millage rates for most home owners. It also curbs property-tax increases by limiting annual tax assessments to 5 percent or the rate of inflation, whichever is less. Assessors record both “taxable” and “actual” assessments for each property. The actual assessment is the state equalized value (SEV), which is 50 percent of a home’s market value.(A home’s SEV usually rises higher than its taxable assessment, though not always.)
The taxable assessment is used to calculate property taxes.
When the home is sold, the Proposal A cap is removed, and the taxable assessment rises to the actual SEV for the new home owner. That’s the new base for assessment increases, which are limited to 5 percent or inflation until the home is sold again.
A home buyer’s assessment increase can be large if a home hasn’t been sold since 1994, when Proposal A took effect. The home would have eight years of artificially capped assessments for tax purposes, while its actual market value rose substantially.
Since Proposal A, the rate of inflation has not increased more than 3.2 percent in any year. But market values of homes have increased dramatically in hot real-estate markets such as southeastern Oakland County.
In those communities, that leads to big assessment increases when homes are sold. Often, the big jump in SEV lags a home’s sale by a year, leaving some home buyers with delayed tax sticker shock.
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Last year, David and Angela Toth bought a home in Royal Oak for $115,000. They knew their assessment would increase, but they weren’t prepared for a jump from $46,650 to $73,630 — a 58-percent increase.
Angela Toth said the assessor used the sale of the home as an excuse to raise her taxes. “Most people don’t realize until they buy a house that the increase is open-ended,” she said.
By law, an assessment is based on a formula that uses comparable home sale prices in the surrounding area during two prior years. Royal Oak assessor Soma said almost all very large assessment increases are the result of lifting the Proposal A cap when houses are sold.
Another consequence of Proposal A is a growing disparity in taxes that home owners pay. Two families in identical homes in the same modest neighborhood could pay property taxes that differ by $1,000 or more a year, simply because one family recently purchased its home and the other has lived in its home for years. The family that hasn’t moved benefits from the assessment cap. The other family assumed a higher market-driven assessment after they bought the home.
Such differences irk Edward Dougherty of Ferndale. He bought his house in 1999, and in 2000 was shocked to see his property taxes rise 58 percent, up to $2,441. This year his taxes increased to $2,546.
His first big increase was the result of the assessment cap coming off the year after he bought the house. The previous owners had lived there for about 30 years, Dougherty said.
“My bad. I should have known,” said Dougherty, 36, an international trade consultant. “I never asked.”
A home next door to his has an almost identical SEV, but because the owner has lived there much longer under the assessment cap, she pays $1,409 a year in property taxes — $1,137 less than Dougherty, according to city records.
Dougherty said it’s unfair that new home buyers, who are usually younger, must pay larger property taxes than older neighbors.
“It’s shifting it onto the backs of younger people, but the younger folks don’t vote,” he said. “We voted this thing in place, so I guess we’re getting what we asked for.”
Dougherty said he can afford the higher taxes, but added, “I sure as hell could be doing other things with the money.”
Ferndale assessor Jay Singh said that tax disparities among similar homes is fundamentally unfair, even if it’s the law.
“There is an incentive to stay put on the property” because a new home almost certainly will cost much more in taxes, Singh said.
Also, Singh said, a few home buyers are unwittingly socked with even higher taxes when they fail to declare their new home as their primary residence, or homestead. For example, some people purchase homes that were used as second homes or rentals. Such non-homestead properties are assessed 18 mills higher under Proposal A.
Unless paperwork available at city or township halls declaring the property as a primary homestead is filed, the new owner will continue to pay the added 18 mills. On a home sold for $150,000, that would mean an extra $1,350 a year in taxes.
Frank Kuhn, a Realtor in Birmingham, said it’s only a matter of time before assessment disparities depress home sales.
“What you’re going to see down the road is that the state shot itself in the foot,” Kuhn said. “People are not going to buy a new house because of the tremendous tax bite they will have to absorb.”
He said older couples who have lived in homes a long time but whose children have left home may decide to stay put, rather than move to other homes where they would pay higher taxes.
One example is a retired couple who have lived on Walters Lake in Independence Township in Oakland County since 1975. Property values there have soared in recent years, but with Proposal A’s assessment cap, the couple is paying far less taxes.
Dollarwise, they say, it would be tough to move.
Their 1,800-square foot house has a state equalized value of $152,200. But their taxable assessment is limited to only $64,000. So, instead of paying $4,525 under their actual SEV, they pay $1,900 a year in property taxes — a 138-percent savings.
“As far as I’m concerned, Proposal A has been great,” said the husband, 68, who spoke on condition of anonymity because he didn’t want to disclose his finances.
He’s an avid fisherman with no desire to move from a lake home where he and his wife raised five children. If they did move, they said, they could not afford taxes on another lake home.
“Our taxes would go to $6,000 or $8,000, not something you can afford on a fixed income,” said the husband, a retired General Motors Corp. engineer.
Taylor, the Birmingham Realtor, said home buyers should either be aware of tax changes or hire a real-estate agent to help them with their purchase. Taylor said the use of so-called buyer agents is growing, though most real-estate sales are brokered through Realtors who represent sellers.
Taylor said he recently helped a buyer calculate property taxes on a home, which he said doubled from $500 a month under the assessment cap to $1,000 a month after the sale.
“They could afford it,” he said.
When Michigan voters passed Proposal A in 1994, they gave themselves protection from big property-tax increases if home prices rise faster than inflation. The law caps the annual increase in property assessments at the rate of inflation or 5 percent, whichever is less.
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The cap is removed when a home is sold. The taxable value then rises to the actual state equalized valuation (SEV), which is 50 percent of the assessed market value.
If a home hasn’t been sold for many years and neighborhood property prices have skyrocketed, the taxable value will shoot up for the new owner, along with property taxes. Property taxes are based on the taxable value of the property and the local millage rate for schools, city or township government, and county government and regional authorities. If a community’s millage is 50 and a home sells for $200,000, the new property tax bill will be about $5,000. A mill costs $1 for every $1,000 of a property’s taxable value.