Michigan Property Tax Increase Limit Is Good For Investors

It’s tax season, so I’m giving more thought to property taxes than I do the rest of the year. And with so many out-of-state investors getting started in Detroit it seems a lot of folks don’t understand the Michigan property tax increase limit and general laws around property taxes in the state.

That’s unfortunate, because a lot of people write Michigan off as having “high property taxes”. While that can be true, the state also has a huge benefit, in Proposal A, that most don’t.

Beyond that, many folks make the mistake of not understanding how their property taxes are calculated and adjusted. This leads to extremely poor investment decisions.

In this post I’m going to break down exactly how Michigan property taxes are determined and adjusted, the benefits of Michigan’s Proposal A, and how you can use all of this information to your advantage.

Let’s get right into it!

Understanding Michigan Property Taxes

Property tax isn’t exactly a sexy topic. 

But saving money is! 

And if you’re a real estate investor in Detroit or Michigan in general, you can save a boatload of money over time by simply understanding how your property taxes are determined and all the ins-and-outs.

So let’s start with the basics and build from there.

Michigan’s State Equalized Value (SEV)

If you start researching Michigan property taxes you’ll find that there are three referenced values: assessed value, state equalized value (SEV), and taxable value.

That’s a lot to keep straight and, to be honest, it’s overkill if all you’re trying to do is understand your Michigan property taxes.

All you really need to know is that the assessed value is basically the value of your property. If you paid $300,000 for a home, that’s typically the assessed value.

Then the state equalized value, or SEV, is 50% of the assessed value. In this case, it’s simply $150,000.

That figure is then used to calculate your property taxes based on your specific county and city. 

The state equalized value (SEV) is reassessed on an annual basis, moving up or down (let’s face it, usually up) and directly impacts your property tax payment.

And for a very long time that’s all there was to it when it came to Michigan property taxes.

Seems simple, right?

The problem with this model is that assessed values, and therefore SEV’s, could spike abruptly higher if property values increased rapidly.

This makes it nearly impossible to plan for property tax payments because there’s no limit to those increases. This is exactly what’s been going on in states like Texas for years. 

Chicago’s Cook County has also made headlines over the same issue. Imagine your property taxes going up 100% in a year!

Fortunately, we don’t have to worry about that in Detroit, or Michigan in general, thanks to Proposal A.

Michigan Proposal A Changed The Property Tax Game

For Michigan, everything changed in 1994 when Proposal A was approved.

Proposal A contained several things but the one we’re concerned with here is the change in which property taxes are determined. Instead of using the assessed value there was a new value added to the mix, the taxable value.

Michigan’s Taxable Value For Property Taxes

When it comes down to it, the taxable value is the one we, as homeowners and investors, care about the most.

This is the value that directly impacts what we’ll pay in property taxes. And thanks to Proposal A, the rules that govern the taxable value solve the issue we discussed above.

Michigan property taxes can be easily calculated so you know exactly what you’ll pay in the future.

The Rules Governing Michigan’s Taxable Value

Under Proposal A there are two key points when it comes to calculating the taxable value. 

But first, understand that the assessed value (what your property is worth) and the state equalized value (50% of the assessed value) still come into play.

We’ll look at that a little bit closer later, but the increases to your taxable value have two big rules.

Taxable Value Is Directly Tied to Inflation

The first thing to know is that your taxable value is directly tied to inflation, as measured by the Consumer Price Index (CPI). 

This is great because your taxes can’t just be raised out of the blue with little to no explanation.

With Michigan’s Proposal A there’s a very clear, third-party datapoint that serves as the property tax increase benchmark.

That said, as we all know, inflation rarely goes down. So we’re almost never going to see a decrease in property taxes.

Our real concern should be those times when inflation is running rampant and completely out of control.

Michigan Taxable Value Increases Are Limited To 5% Annually

Thankfully, Proposal A accounted for that. 

The Michigan property tax increase limit is 5% per year no matter what inflation does.

So, for example, if CPI averaged 8% for the year, your property taxes will be going up 5%.

If CPI was 3% for the year, you’ll see a 3% increase in your property taxes.

So yes, your property taxes are likely going up each year but a) there’s plenty of transparency into how these increases are happening, and b) there is a cap to the potential increases.

Hopefully by now you’re realizing how beneficial this can be to property owners in Michigan.

Benefiting From The Michigan Property Tax Increase Limit

There are two main benefits to Proposal A and its ability to limit Michigan property tax increases. 

The first, the ability to know and project your future property tax liability, is something we’ve already discussed. 

Sure, we don’t know what CPI will be each year in the future but it’s easy to take the worst case scenario and just assume 5% annually. Or we could use something more in-line with historical averages and assume 3.5%.

But the annual cap on property taxes created by Proposal A yields another huge benefit.

Long-Term Property Holders In Michigan Benefit

I know there are a lot of terms we’ve covered in this post. And, given the dryness of the material, it’s easy to lose track of all their meanings.

But if you recall, the assessed value (what your property is actually worth) is determined by the market.

That means the state equalized value, which is simply 50% of the assessed value, is also tied to market conditions.

As we all know, the housing market can do whatever the heck it wants. And it can certainly appreciate faster than the rate of inflation!

So what am I driving at?

Generally speaking, your taxable value (the one that’s tied to CPI and capped at 5% annual increases) will go up at a lower velocity than your state equalized value.

Let’s visualize that. 

Michigan Property Tax Increase Limit Example

Say we purchased a rental property in Detroit and the state equalized value is $15,000. That means in your first calendar year of ownership your taxable value will also be $15,000.

Now let’s assume that homes in that area appreciate at 5% annually for the next 10 years. But during that time inflation only averages 3.5%.

At the end of the 10 year period your taxable value is $19,572 and your SEV is $23,270:

That would equate to an annual property tax payment of $1,711 in year 10. But if you were to sell that property at that time, the new owner would be paying $2,034.

This assumes the property is located in the city of Detroit, where I invest. But each city is going to be different.

State Equalized Values Can Increase Much Faster

Still, this doesn’t seem like THAT big of a deal, right?

But remember, while we can project our taxable value with averages or the worst case scenario of 5% annual increases, we have zero clue what the market will do.

What if, in 10 years, home prices double? The SEV should also double.

And in Detroit, where we’re seeing major revitalization and investment, that’s exactly what’s going on.

How do I know? I’m living it!

Take, for example, The Great Greydale, one of the first rental properties I purchased in Detroit. My taxable value on that home is currently $14,627 which means I’m paying $1,279 per year in property taxes.

But the state equalized value (SEV) on that home is a whopping $39,400. That means if I sold the home today, the new owner would be paying $3,444 per year!

Note: The home is worth ~$110,000 today which is counterintuitive given the SEV is ~$40,000. The SEV isn’t always perfectly 50% of the home’s value. I find this to be especially true in Detroit where the market isn’t as efficient with the SEV as the suburbs.

That’s an absolutely massive swing of $180/month!

That may seem like overkill but think about it… a lot of investors would be happy to net $180 per month in cash flow. This is an EXTRA $180 I’m making each month simply because I’m paying a lower property tax rate.

And next year it will be even more… and the next year, and the next, and next, etc.

You can easily see why long-term holders benefit from the Michigan property tax increase limit put in place by Proposal A.

This property is not an anomaly in my portfolio. Out of all 10 of my properties, my state equalized values are significantly higher than my taxable values, most are over 100% higher!

This is vital to understand, not just in an effort to grasp the bigger picture of longer term benefits of holding property in Michigan, but also when analyzing deals. 

And it’s something I cover in-depth in The Detroit RE Playbook, something every prospective Detroit real estate investor should be buying.

How To Keep Michigan Property Taxes Low

There are two ways to make sure your property taxes are low when investing in properties in Michigan.

Remember, the state equalized value, or SEV, is what we care most about. The lower the SEV, the lower your property taxes will be.

Make Sure Your Property Has a Low SEV

This may seem silly, but the best way to keep your property taxes low is to make sure they START low.

That means knowing your SEV before you purchase a property. Again, this is something I go cover in detail in my Detroit real estate investing course.

That said, you should never buy a property simply because it has a low SEV. And there are plenty of properties with average, or even high, SEV’s that are worth purchasing.

But if you find a property that makes sense for your you AND the state equalized value is far lower than it should be (this happens), that’s awesome!

That means your taxable value is artificially low and you get to lock it in thanks to Proposal A.

Beyond that, you really only have one other shot at trying to control your taxable value.

Appealing Your Michigan Property Taxes

I have had insanely great success appealing property taxes on my Detroit rentals. In fact, on average I’ve managed to reduce my taxable values by over 50%.

Yes, 50%!

By now, you should grasp what an insanely huge win this is.

Remember our chart from above… If I purchased a property today with a state equalized value of $15,000 and managed to get it reduced to $7,500 I am saving $656 in the first year alone. Then I’m saving that plus the delta between the SEV and the taxable value going forward until the day I decide to sell.

It’s a massive advantage and it cost me nothing but a few hours of my time to prepare an argument and present it.

For these reasons, I highly recommend everyone take a shot at appealing your property taxes. You have nothing to lose and lots to gain!

In the future, I plan to create a short course that outlines my exact approach to appealing my Detroit property taxes and how you can likely be successful doing the same.

For now, hopefully this post serves as a super helpful rundown about property taxes in Michigan and how, as a long-term real estate investor, you greatly benefit from Proposal A.