Yes, Your Property Taxes CAN Go Up When Your Property Value Goes Down
In 1994, Michigan voters approved the constitutional amendment known as Proposal A. A term known as “Taxable Value” was created as a part of this legislation. Before the enactment of Proposal A, some homeowners were being taxed out of their homes because the value of their home was rising so quickly, and taxes were based on the value of the home. The intent of Proposal A was to contain or limit how fast the value used to calculate taxes could increase in any given year and this created what is known as Taxable Value. Now with Proposal A, your taxable value is only allowed to increase by the rate of inflation, or 5%, whichever is less.
The Assessed Value or SEV is the “state equalized value” of your home as determined by the Assessor’s Office. This number is calculated by looking at recent sales and other data to reflect 50% of the true market value of your home. Unlike taxable value, this number has no cap. It will go up and down just as the market does.
When a home is newly purchased, the SEV and Taxable Value will match. The assessor must adjust, or uncap, the taxable value when a home sells. The taxable value will become equal to the SEV. In the year following the sale, the process starts over again and the taxable value increases only 5% or the rate of inflation, whichever is less, irregardless of how much the SEV goes up.
Since 1994 and the enactment of Proposal A, in many parts of Michigan, housing values have been increasing much higher than 5% annually. The good news about Proposal A is that even if your home assessed value/SEV went up 10%, your taxable value could only go up a maximum of 5%. (The increase in taxable value has never gone up in any given year more than 3.7%, the rate of inflation) This means that in many years since 1994, your taxable value has gone up much less han your assessed value/SEV, resulting in you paying taxes on less than the actual assessed value/SEV of your home.
The bad news is that in a slowed real estate market your SEV may go down, but your taxable value, which is already lower than your SEV, will not. It can actually go up 5% or the rate of inflation, whichever is lower, as defined by Proposal A. Your taxes will not go down until your SEV drops to the level of your taxable value. Then as your SEV drops, so will your taxable value, and so will your taxes. Realistically, we should hope that this doesn’t happen. It would require a very long downturn in the housing market to bring SEV and taxable value back into alignment. Look at your tax statement. Do you really want your home assessed value/SEV to equal your taxable value?
In summary, you reaped benefits in the form of lower taxes when times were good. When times are tough, like the last few years, you end up paying back some of what you reaped. Let’s all hope for a return to good times.
The following chart illustrates how SEV and taxable values move in both a positive and decling real estate market. In this example, a $200,000 home is newly purchased in year one.
|Year||Year 1 - 5
||Year 6 - 9
||Year 10 - 11
|House Market Increases
|1||100,000||100,000||SEV going up just as the market does, Taxable Value capped at inflated rate.
|6||134,689||114,801||SEV going down, Taxable Value still increasing per inflation rate.
||124,156||124,156||House Sold in Year 9.
|11||117,948||117,948||Taxable Value goes down because it cannot be higher than the SEV.