Exclusion for Qualified Principal Residence Indebtedness Extended until December 31, 2012

In my previous article When You Can Avoid Paying Income Tax on a Forgiven Mortgage, I discussed how the Mortgage Forgiveness Debt Relief Act of 2007 provided that qualified debt on a principal residence discharged between January 1, 2007 and December 31, 2009 was tax exempt.

Please be aware that pursuant to the Emergency Economic Stabilization Act of 2008, the discharge deadline has been extended until December 31, 2012. This is critical information for individuals facing the prospect of discharging mortgage debt in this difficult economy.

What Disclosure Requirements Does a Seller of Michigan Residential Property Have to a Buyer?

Buying a home is one of the largest purchases that a person can make. Diligent home buyers obtain inspections to determine the condition of the property. However, the typical home inspection takes a few hours during one day and is largely based on what the inspector can see on that particular day. The weather, time of day, and time of year all may influence what an inspector observes. Furthermore, unless the home buyer seeks specific inspections and specific expertise, the inspector may not be able to fully evaluate certain aspects of the property (e.g. sewer line connection).

In order to determine what inspections are needed, buyers often rely on the disclosures that sellers make concerning the condition of the property. One of the leading causes of legal disputes between buyers and sellers is when the actual condition of the property differs from what the seller has disclosed to the buyer.

Seller Disclosure Act

In Michigan, the Seller Disclosure Act (MCL 565.951, et seq)(the "Act") governs a seller's disclosure requirements with respect to residential real estate transactions. Some of the key provisions of the Act include, but are not limited to, the following:

1. Unless an exception applies, a transferor of residential real estate must deliver to the transferee or the transferee's agent a written disclosure statement concerning the condition of the property which conforms to the Act. MCL 565.954. The form required by the Act is set forth in MCL 565.957.

2. Each disclosure required by the act is to be made in good faith. Under the Act "good faith" means honesty in fact in the conduct of the transaction. MCL 565.960.

3. The Act applies to the transfer of real estate consisting of not less than 1 or more than 4 residential dwelling units. MCL 565.952.

4. Under the Act transfers of Real Estate include sale, exchange, installment land contract, lease with an option to purchase, any other option to purchase, ground lease coupled with proposed improvements by the buyer or tenant, or transfer of stock or an interest in a residential cooperative. MCL 565.952

5. The seller disclosure requirements of the Act do not apply in all residential real estate transfers. MCL 565.953. Specific exceptions include, but are not limited to (see MCL 565.953 for all exceptions):

(a) Transfers pursuant to a court order.

(b) Transfers to a mortgagee by a mortgagor who in in default.

(c) Transfers by a sale under a power of sale.

(d) Transfers by a nonoccupant fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust.

(e) Transfers from 1 co-tenant to 1 or more other co-tenants.

(f) Transfers made to a spouse, parent, grandparent, child, or grandchild.

(g) Transfers between spouses resulting from a judgment of divorce.

(h) Transfers or exchanges to or from any governmental entity.

(i) Transfers made by a person licensed under article 24 of Michigan's occupational code (i.e. residential builders, residential maintenance and alteration contractors, and related salespersons) of newly constructed residential property that has not been inhabited.

6. The seller's disclosure statement must be delivered before the transferor executes a binding purchase agreement with the transferee or, in the absence of purchase agreement, before a binding installment sales contract is executed. Otherwise, the transferee will have the right to terminate the purchase agreement for a period of 72 hours after delivery of the seller's disclosure statement if it is delivered in person or for a period of 120 hours after delivery of the seller's disclosure if it is delivered by registered mail. In any event the transferee's right to terminate the purchase agreement expires after the property is transferred by deed or installment sales contract. MCL 565.954.

7. A transferor or the transferor's agent is not liable for any error, inaccuracy, or omission in any information provided in a seller's disclosure statement if the error, inaccuracy, or omission was not within the personal knowledge of the transferor, or was based entirely on information provided by public agencies or provided by certain experts (e.g. licensed professional engineers, professional surveyors, contractors, etc.), and ordinary care was exercised in transmitting the information. MCL 565.955.

8. An agent of a transferor is not liable for any violation of the Act by the transferor unless the agent knowingly acted in concert with the transferor to violate the Act. MCL 565.965.

9. It is not a violation of the Act if the transferor fails to disclose information that could be obtained only through inspection or observation of inaccessible portions of real estate or could be discovered only by a person with expertise in a science or trade beyond the knowledge of the transferor. MCL 565.955.

10. If information disclosed in accordance with the Act becomes inaccurate as a result of any action, occurrence, or agreement after delivery of the required disclosures, the resulting inaccuracy does not constitute a violation of the Act. MCL 565.956.

11. A city, township, or county may require disclosures in addition to those disclosures required by the Act and may require disclosures on a different disclosure form in connection with transaction subject to the Act. MCL 565.959.

12. The specification of items for disclosure in the Act does not limit or abridge any obligations for disclosure created by any other provisions of law regarding fraud, misrepresentation, or deceit in transfer transactions. MCL 565.961.

13. A transfer subject to the Act is not invalidated solely because of the failure of any person to comply with the Act. MCL 565.964.

Conclusion

Being aware of the requirements of the Seller Disclosure Act are critical to both buyers and sellers of Michigan residential property. Buyers need to understand what obligations a seller has to disclose property conditions so that they can adequately determine what inspections they need to obtain. This is especially true in an era of increasing foreclosures and more and more bank owned properties. Assuming seller disclosure requirements that don't exist can be a disaster for a prospective buyer. Similarly, sellers need to understand their legal obligations under the Act to avoid exposing themselves to liability. Understanding and complying with the Seller Disclosure Act can reduce risks for all parties involved in a residential real estate transaction.

Michigan's Seller Disclosure Act can be reviewed here: Seller Disclosure Act.

The Most Important Part of a Real Estate Transaction: The Legal Description

You walk into a bookstore, you pick out a book, you pay for it, the clerk places the book into a bag, hands you a receipt, and you leave the store with the book. There is no question in anyone's mind about who now owns that book. You know you own the book. The store knows you own the book. You have a receipt confirming your purchase of the book. No one is challenging your ownership of the book. Another shopper isn't going to come up to you after you bought the book and suddenly claim that the book is actually their book and demand that you give it to them. You aren't going to arrive home and find your neighbor demanding ownership of the last three chapters of the book.

However, what if the property that you desire to purchase is real estate? To purchase real estate buyers and sellers enter into contracts and to transfer ownership the seller must deed the property to the buyer. But when real estate is sold, how do the parties know what is actually being sold? A buyer doesn't walk into the house store, pick out their house, pay for it, receive a receipt, and drive away with the house in the trunk of his or her car. Accordingly, how do the parties know what is actually the subject of their transaction? The answer: the legal description.

The legal description is the most important part of any real estate transaction. As the name indicates, it legally describes the real estate involved. If the transaction is a sale, then it describes what a buyer is buying and what a seller is selling. However, the legal description is used to describe property in all kinds of real estate transactions, not simply sales transactions. For example, legal descriptions are used in mortgages, claims of lien, easements, title insurance policies, and leases. Failing to understand and verify legal descriptions can be a costly mistake.

Accordingly, here are ten things that you must know about legal descriptions in Michigan real estate transactions:

1. In any real estate transaction, property should be legally described. Relying on a post office address or a tax identification number is not sufficient.

2. There are four methods to describe real estate: (1) by sections and divisions of sections, (2) by metes and bounds, (3) by reference to a platted subdivision, and (4) by reference to a condominium.

a. Sections and Subsections: With a few exceptions, the state of Michigan is divided into square units consisting of townships, ranges, and sections by federal government surveys from the 1800s.

b. Metes and Bounds: Metes refers to units of measurement and bounds refers to boundaries that may be either natural or artificial. A metes-and-bounds description begins at a specified point and proceeds for certain specified distances until it returns to the point of the beginning. Directions are given by degrees.

c. Plats: A plat is a scaled diagram of property that is subdivided into lots based on a recorded survey. A platted lot may be described by referencing the lot number in the plat and the recording information of the plat.

d. Condominiums: A condominium is property that is divided into condominium units with various portions of the development under common ownership. A master deed is recorded with a a subdivision plan to establish the condominium and the condominium units. A condominium unit may be legally described by referencing the unit number and the recording information for the condominium master deed.

3. Metes-and-bounds descriptions may be combined with the other methods of describing property.

4. If there is any doubt about the validity of a legal description, obtain a survey.

5. Don't assume that a legal description in a prior real estate document or a tax bill is accurate.

6. Make sure the legal description is complete. For example, in a metes-and-bounds description ensure that the property lines trace back to the point of beginning.

7. Double check the work of surveyors and title companies. Anyone can make a mistake. Also, consider obtaining a survey endorsement to a title insurance policy to insure against the loss resulting from an inaccurate survey.

8. Cross-reference all legal descriptions in a real estate transaction. Begin with the title commitment and the survey and then look at the other documents.

9. Visit the property to ensure the legal description fits.

10. Make sure the legal description includes any additions that are subject to the transaction (e.g. easements).

Understanding legal descriptions is a vital part of any real estate transaction. Real estate transactions often involve large sums of money. Failing to properly evaluate a legal description is like buying a book without reading the cover. You might get lucky and love what you've bought, or you might not and the cost could be substantial.

Michigan Municipalities are Not Shielded From Claims Brought Pursuant to the Doctrine of Acquiescence

In Michigan, under the doctrine of acquiescence a property owner may obtain legal ownership of property running to an incorrect boundary line, if the property owner can prove by a preponderance of the evidence that both property owners treated this line as the boundary line for a period of at least 15 years (See MCL 600.5801).

Under Michigan law, the State of Michigan is not limited by the 15 year period and therefore may defeat a property claim brought pursuant to the doctrine of acquiescence (See MCL 600.5821(1)). However, in its recent decision in the case of Gerald Mason and Karen Mason vs. City of Menominee (click link for entire text of decision), the Michigan Court of Appeals held that municipalities are not shielded from property claims brought pursuant to the doctrine of acquiescence if the municipality did not bring the action to recover the property.

In this case, the Masons brought an action to quiet title to certain property owned by the City of Menominee. The lower court determined that the Masons had acquired the property pursuant to the doctrine of acquiescence. The City argued that under MCL 600.5821(2), they were shielded from a doctrine of acquiescence claim. MCL 600.5821(2) states, "Actions brought by any municipal corporations for the recovery of the possession of any public highway, street, alley, or any other public ground are not subject to the periods of limitations."

The Court looked closely at MCL 600.5821(2) and based on a plain reading of the statute noted that because the Masons brought the suit and not the City of Menominee, the City could not use the statute as a defense to defeat the Mason's quiet title action. Accordingly, the Court of Appeals affirmed the decision of the lower court awarding the Masons the disputed property.

This decision raises interesting questions about whether the Michigan Legislature intended to provide different levels of protection for property owned by the State as opposed to property owned by municipalities. If the legislature did not intend this result, there will certainly be future legislation. Also, this decision provides a significant incentive for property owners and municipalities to be the first to file in future property disputes, as the winner will obtain a huge advantage in litigating their claim.

American Recovery and Reinvestment Act Modifies Tax Laws Affecting Real Estate

On February 17, 2009 the President signed the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) into law. This massive piece of legislation introduced a number of changes to United States tax law.

Some of the key changes involving real estate include modifying: (1) the First-Time Homebuyer Tax Credit, (2) the Residential Energy Property Credit, and (3) the Residential Energy Efficient Property Credit.

CCH Incorporated has a helpful summary of the law's tax changes here: American Recovery and Reinvestment Act of 2009 Special Report.

You can view the entire text of the American Recovery and Reinvestment Act of 2009 here: P.L. 111-5.

Can the Taxable Value of Michigan Property Increase in a Declining Real Estate Market?

Yes, the taxable value of Michigan property can increase, even in a declining real estate market. As a result, the press, politicians, and the public are grappling with Michigan property tax law and debating whether changes need to be made.

I discussed how Michigan property is taxed in my prior article "Why a Transfer of Ownership May or May Not Increase the Taxable Value of Your Home." As a reminder, the taxable value of property in Michigan (which has not been transferred) is equal to the lessor of:

(a) The property's taxable value in the immediately preceding year minus any losses, multiplied by the lesser of 1.05 or the inflation rate, plus all additions.

(b) The property's current state equalized valuation. MCL 211.27a.

The state equalized valuation of the property is equal to the assessed value of the property as adjusted following county and state equalization (oftentimes, a property's assessed value is equal to its state equalized valuation). The assessed value of the property equals 50% of the true cash value of the property. MCL 211.27a(1). Michigan law defines the "true cash value" of property as the usual selling price at the place where the property to which the term is applied is at the time of assessment, being the price that could be obtained for the property at private sale, and not at auction sale except as otherwise provided in MCL 211.27a, or at forced sale. Put another way, generally, "true cash value" is the usual selling price of the property where it is located in a private sale. See MCL 211.27a for further information on how the "true cash value" of property is determined.

MCL 211.27a acts as a cap preventing taxable value from exceeding a 5% increase per year if the property has not been transferred. When property values are rising, the cap benefits taxpayers. However, what happens when property values fall?

If a property's taxable value is less than its state equalized valuation, then the taxable value of the property will still increase at the lesser of the rate of inflation or 5% even if the property's overall value has decreased. However, note that under no circumstances can a property's taxable value exceed its state equalized valuation. In other words, if in 2007your property's taxable value in 2008 could not exceed $180,000. However, if in 2007 your home's taxable value was $100,000 and its state equalized value was $200,000 and in 2008 its state equalized value dropped to $180,000, your property's taxable value in 2008 would still increase by the lesser of the rate of inflation or 5% (minus losses and plus additions).

Some in the press and in politics are claiming this development is a "glitch" in the law that needs to be corrected. Some are arguing that if a property's value declines or remains the same, then its taxable value should not increase under any circumstances. In fact, Michigan State Representative Brian Calley recently introduced House Joint Resolution B which is legislation designed to ban property tax increases when the value of the property falls or stays the same. It is anticipated to be an interesting legislative battle, as those that rely on property tax revenue are not likely to be in favor of such a ban.

What do you think? Should the law be changed? Should there be a ban on property tax increases when property values fall? Please post your thoughts in the comments section below.

Michigan's State Real Estate Transfer Tax Act Expands

On January 9, 2009 House Bill 6122 was signed into law and designated as 2008 PA 473. The law, effective retroactively to January 1, 2007, extends Michigan's State Real Estate Transfer Tax to contracts for the transfer or acquisition of a controlling interest in any entity if the real property owned by that entity comprises 90 percent or more of the entity's fair market value.

Under the new law "controlling interest" means more than 80 percent of the total value of all classes of stock of a corporation, more than 80 percent of the total interest in capital and profits of a partnership, association, limited liability company ("LLC"), or other unincorporated form of doing business, or more than 80 percent of the beneficial interest in a trust.

However, the law exempts from the tax a conveyance that is one of the following: (1) a transfer between any corporation and its stockholders or creditors, between any LLC and its members or creditors, between any partnership and its partners or creditors, or between a trust and its beneficiaries or creditors, when the transfer is to effectuate a dissolution of the corporation, LLC, partnership, or trust, and it is necessary to transfer the title of real property from the entity to the stockholders, members, partners, beneficiaries, or creditors; (2) a transfer between any LLC and its members or between any partnership and its partners if the ownership interests in the LLC or partnership were held by the same people and in the same proportion as in the LLC or partnership before the transfer; (3) a transfer of a controlling interest in an entity with an interest in real property if the transfer of the property would qualify for exemption if it had been accomplished by deed to the property between the people who were parties to the transfer; and (4) a transfer in connection with the reorganization of an entity if the beneficial ownership does not change.

To read the entire text of the new law, including all circumstances when Michigan's State Real Estate Transfer Tax applies and all applicable exemptions, click here: House Bill 6122.