A new law imposes state transfer tax on transactions previously thought not to be subject to that tax and impacts completed transactions because it is retroactive to January 1, 2007.

Prior to the recent amendments, an owner of real property in Michigan incurred both state and county transfer taxes when transferring his or her ownership. But neither transfer tax was imposed for the transfer of interests in an entity holding such property because actual ownership of the property remained in the entity. Thus, many real property transactions were structured to sidestep both transfer taxes by transferring interests in an entity holding title to real property.

However, under the new law, the owner of a business entity or the beneficiary of a trust must pay state transfer tax if (1) 90% or more of the fair market value of the entity or trust assets are comprised of real property, and (2) the owner or beneficiary transfers 80% or more of the total interest in the entity or trust. As long as these two tests are met, a state transfer tax will apply even if the business entity or trust continues to hold the title to the real property.

The county real property transfer tax in Michigan has historically been relatively modest at $1.10 per $1,000 of value. However, the state transfer tax is $7.50 per $1,000 of value. Therefore, the impact of this law may be an important consideration in these types of transfers.

The Michigan Legislature did not make counterpart amendments to the county transfer tax statutes. Therefore, while a transfer of interests may now be subject to a state transfer tax, such transactions may still be exempt from the county transfer tax.

Certain transactions continue to be exempt from both the state and county transfer taxes under the new law. Nonetheless, the new law is expected to impact many business entities and trusts, including multi-tier entities where one entity owns an interest in another entity that actually owns the real property. Unfortunately, there are numerous unanswered questions at the time of publication regarding compliance with these amendments.

If you engaged in a transaction at any time since January 1, 2007 that may be subject to the new transfer tax, or if you have any other questions regarding compliance with the new law, you should consult your attorney for further advice.

For further information regarding these matters, please contact Ms. Chon at 248.740.5689 or click here to send an email. Contributors to this article: Gloria M. Chon, William B. Acker and Thomas C. Rauch.

A new committee of attorneys from the State Bar’s Real Property Law, Taxation Law and Business Law Sections has been formed to analyze this new law and present proposals to the Michigan legislature for statutory amendments. William B. Acker will serve as Chair, and Gloria M. Chon will be a member of that committee. If you have any concerns about the new law and want the committee to consider them, please address them to either Mr. Acker (248.740.5665) or Ms. Chon.