Homeowners pay real property taxes on their homes. Principal residences are exempt from the 18-mill tax for school operating purposes. This reduction in property taxes is known as the homestead exemption—not to be confused with the Homestead Property Tax Credit which is a refundable tax credit claimed on Michigan income tax returns.
The 18-mill exemption reduces a homeowner’s property tax bill by 1.8% of the home’s taxable value.
Example: Joan buys a home for $200,000. The home’s initial taxable value is $100,000. The total property taxes on her home equal 56 mills. Her total property taxes for the year are $5,600. However, since Joan uses the home as her principal residence, she qualifies for the homestead exemption which reduces her millage by 18 points down to 38 mills. Her total property taxes with the homestead exemption are now $3,800 (saving her $1,800 dollars)
The homestead exemption applies only as long as the home is being used as a principal residence. When the home is no longer used as a principal residence, the homeowner has to notify the assessor that it is no longer her principal residence. The assessor will then remove the homestead exemption and increase the millage by the 18 mill school operating assessment.
When homeowners move out of their principal residences and rent it out, they must be sure to notify the assessor that the home is no longer being used as their principal residences since the homes are now rented out.
Example 1: Same facts as above, except that Joan buys a new home and rents out the old one. Joan will claim a homestead exemption on the new home and must relinquish the homestead exemption on the old home. Her property taxes on the old home will increase. She should increase the rent she is charging the tenant to cover this increase in property taxes.
Failing to notify the assessor will result in the assessment of back taxes (the 18 mill school operating assessment) against the homeowner plus penalties and interest.
Example 2: If Joan decides not to notify the assessor, she risks the assessor finding out that the old home is rented. The assessor will assess back taxes for the years the home was rented with the homestead exemption in place. Joan will also be subject to penalties and interest.
There is an exemption for people who are no longer using their homes as a principal residence because they are on active duty in the military.
There is also an exemption for people who are selling the home if the home remains unoccupied and for sale for up to three years.
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Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.