I have a home under contract in Michigan. The Seller’s current real estate taxes are $800 a year. If I bought this home the normal way, the real estate taxes would reassess to $20,000 a year. In the sales contract, the Seller has agreed to convey the property to a Land Trust at closing, wherein a Florida attorney of my choosing would become the Trustee, and then the Seller would immediately execute an Assignment of Beneficial Rights to me. Obviously, I am trying to avoid the huge real estate taxes. I tried to find an attorney in Michigan who has handled land trusts there, but to no avail.
Has anyone ever bought or sold property in a land trust in Michigan? If so, I’m looking for assurances that it can be done effectively. I’ve done these trusts in other States but never Michigan. I need help to make sure I don’t goof up.
Response to BLL: Land Trusts are perfectly legal in all but two States. There is a good book out by an attorney, Mark Warda, which describes how Land Trusts can be used in all but two States. Even though I have a copy of this book and am also an attorney, I would prefer to have a Michigan attorney handle the transaction for me.
You are correct that I am trying to prevent a reassessment of the property taxes. It is legal for an owner to deed his property to a Trustee and retain ownership of the property. People do that all the time. Such an event would not trigger a reassessment of property taxes. Then, by “assigning” the beneficial rights to another party, the owner transfers his beneficiary status to another party and this is treated as “personal property” and not real property. The Trustee still owns the property (so you better trust the Trustee) and the buyer (third party) now has the use of the property but doesn’t own it. All perfectly legal.
Some States have “buried” rules about these trusts, that include transfer taxes, etc. That is why it might be good to talk to an attorney in Michigan who has worked with them. The trust needs to be prepared correctly.
Response to tatertot: Yep. Your basis and depreciation would INITIALLY be gone. Very good point. However, prior to resellling the property, you could have the Trustee convey the property to you. The beneficiaries in a Land Trust can fire the Trustee and they control the Trustee. You would then pay the transfer taxes, stamps, etc. and show IRS that you paid whatever amount originally for the property. So, while you didn’t depreciate the property, you still have the entire basis to offset capital gains taxes. And if you had depreciated the property, you would have had to “recapture” that at the time of the sale. So your basis is protected.
Or you could forgo the basis, and rely upon the $500,000 married couple exemption to help out, and then sell the property through the Trust – again through an assignment of beneficial rights. This would pass on the protection from super high property taxes. Michigan is one of the highest property tax States in the nation.
In my case, I would be paying $400 a week in property taxes for a summer cottage. Ridiculous.
Please provide the MI tax ruling/opinion that upholds this analysis when you get it from the MI attorney. I have yet to find a tax authority that takes a position that does not maximize revenue.