How to Calculate Michigan Property Taxes on Investment Properties
Michigan property taxes are a fee charged against real property by the local municipality. This may be a Township, Village, City, County or, in some cases, a combination.
Property taxes are typically billed twice per year – summer and winter. In this post we will go over how to calculate your Michigan Property Taxes.
Disclaimer: Access Property Management Group, LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. End Disclaimer.
Four Important Numbers
There are 4 important factors you need to know when calculating or estimating your Michigan property taxes:
- Taxable Value (TV) – The amount on which the CURRENT OWNER is taxed. Annual increases in the TV of a property are “capped” to the LESSER OF the Consumer Price Index (CPI) or 5% (per state law). The TV may change if there are improvements to a Property or Sale of a Property.
- State Equalized Value (SEV) – HALF of the MARKET value of the property. This value is updated annually by the local Assessor and may go up or down. The SALE of a property will cause the TV to be “uncapped”. This means the TV will change to match the SEV at the time of the sale. Be sure to run your financial analysis on a prospective investment property using this NEW UNCAPPED valuation! Many a people have been badly burned when using the seller’s property tax bills!
- Millage Rate (mils) – One mil equals $1 of tax per $1,000 of the TV. Millage rates can vary significantly by municipality. Summer tax mils + winter tax mils = total annual mils. Here is a list of millage rates for Michigan.
- Principal Residence Exemption (PRE) – This is an 18 mil REDUCTION in property taxes only available to owner-occupied homes. You will also see this called the owner’s primary or principal residence. The PRE may also be pro-rated for multi-unit residential properties where the owner lives in one of the units. You will also see this called the Michigan Homestead Exemption. Learn more about the PRE in this blog post.
Buying vs Owning
The calculation of property taxes depends on a few factors about the ownership of the property:
- Buying a property
- Current Owner of a property
- Principal or Primary Residence
- Rental Home or Non-primary Residence
To show the differences with each situation we will use a sample property with the following tax rates:
Primary Residence (Existing Homeowner):
First we will cover if you are the current owner of this property AND this home is your primary residence. You will use Taxable Value, the Millage Rate and the Principal Residence Exemption in this calculation. For this example the millage rate would be 50 – 18 (PRE) = 32 mils:
$30,000 TV / 1,000 = 30 x 32 mils = $960
Rental Home (Existing Investment Property):
Next situation: you are the current owner of this property AND this is a rental or 2nd home (NOT your primary residence). You would still use the TV and millage rate but the Principal Residence Exemption would not apply. For this example the millage rate is not reduced:
$30,000 TV / 1,000 = 30 x 50 mils = $1,500
Buying Property as Primary Residence:
Thirdly, if you are buying this property as your primary residence, use the SEV, millage rate and the PRE to estimate your taxes after purchase. So we go back to the 32 millage rate:
$45,000 SEV / $1,000 = 45 x 32 mils = $1,440
Buying Property as Rental Home
Finally, let’s say you are buying this property as a rental or 2nd home. Your taxes after purchase would be estimated using the SEV and full millage rate only:
$45,000 SEV / $1,000 = 45 x 50 mils = $2,250
Choose the Right Equation
There you have it. Figuring out what numbers you are working with is the hardest part. Once you have those, you can plug them into the equation that fits your situation. But make sure you use the right equation when calculating your Michigan Property Taxes. As you can see there is a significant difference in the annual property taxes after a sale and depending on the use of the property.
Don’t Make This Mistake:
The biggest mistake you can make when purchasing any property is to estimate future property taxes based on how much the seller is currently paying! In doing so you could potentially underestimate your taxes by 50% or more. This mistake could easily erase all potential cash flows on a rental property.
Need help figuring our your millage rate before you buy? We would be happy to help. Email us at email@example.com or call us at 616-301-9450.