Principal residency and foreclosures

The Senate Finance Committee took up legislation in August to deal with the issue of the May 1 deadline for filing Principal Residence Exemptions (PRE).  Senate Bill  77, as introduced by Sen. Jud Gilbert (R-Clay Twp.), would have required all PREs to be prorated based on the date that they were filed. However, MTA has made it clear that this concept of proration contains numerous significant administrative problems. As a result, the legislation took a new and unique approach to the PRE issue.

The May 1 filing deadline for PREs has been an issue since its inception in 1994. The PRE was only an issue for newly constructed homes, homes that were converting from vacation homes to full-year residences, and homes that have sat vacant for a long period of time while on the market. However, a new category has developed, which may be as large as the others combined, which would be homes that have gone through bank foreclosure proceedings. Virtually all homes that have gone through foreclosure have lost their PRE status, which becomes an issue when any sale occurs after May 1. If the sale occurs prior to May 1, the PRE becomes effective for the first tax bill paid by the new homeowner.

SB 77, as amended, tries to deal with the issue that these new homeowners are paying higher property tax rates on a temporary basis. SB 77 would establish two deadlines for filing a PRE with the local assessor. The law would maintain the May 1 deadline, which would place the home in good standing for the entire tax year. The real change that the bill seeks to make is to allow a second deadline of Oct.1, which would only impact the winter tax bill.

The legislation states that if a person files the PRE between May 2 and Oct. 1 of any tax year, they would be exempt from paying any of the 18-mill school tax that occurs on the winter tax bill.  As MTA pointed out to the Senate committee, this will have different impacts in different parts of the state. If 100 percent of the local school tax is billed on the summer bill, this legislation will have no impact on the PRE status of that home for the current tax year. If, on the other hand, the school taxes are all billed in the winter, this proposal would effectively extend the deadline for the new homeowner to save on their property tax bill. However, there is a third situation as well. Some districts split the 18-mill tax 50/50 between the summer and winter bills. In this case, the new homeowner would be exempt from the 9 mills levied in the winter.

Finally, the legislation does have some negative impacts on other individuals who are trying to sell their homes. The value of homes has been severely impacted by the glut of foreclosed properties on the market. This legislation will mean in some cases the foreclosed homes will be even more attractive to the potential buyer compared to the current situation. Unfortunately, this means that a person who might have walked away from a foreclosed property and instead purchased an owner-occupied property may instead buy the vacant home. Good for the neighborhood, not so good for the owner-occupied home.