New rules for transferring business real property without uncapping


Will transferring business real property from one family entity to another trigger higher property taxes?

That depends on whether the receiving entity is under “common control” with the conveying entity. Previously, for two entities to be under common control, there needed to be, among other things, overlapping ownership of not less than 80%.

Now, under a recent court decision, common control must be determined not on the percentage of overlapping ownership but on actual “control” — the possession of the power to direct the entities to take action or cause the management of the entities to take action.

Uncapping, transfers, common control

In Michigan, annual increases in the taxable value of property are the lesser of the rate of inflation or 5%. However, when a “transfer of ownership” occurs, the taxable value becomes “uncapped” and the state equalized value (SEV) becomes the new taxable value. SEV is the state’s appraisal of the fair market value of the property, which in light of low inflation rates and rising fair market values, could lead to significantly higher property taxes when a transfer of ownership occurs.

Fortunately, all transfers are not treated the same under Michigan law; many are exempt from uncapping. One such exemption is the “commonly controlled” exemption, under which an entity can transfer property to another commonly controlled entity and avoid uncapping of the property’s taxable value.

Michigan’s statute doesn’t explicitly define commonly controlled, so the State Tax Commission issued guidelines that required, among other things, at least 80% overlapping ownership between the two entities.

Bright line rule v. actual corporate governance

In 2015, TRJ Properties Inc. transferred its interest in an apartment building to TRJ & E Properties LLC. Four brothers equally owned TRJ & E. TRJ was owned by three of the brothers and their father. Combined, the three brothers held 75% of TRJ & E and 60% of TRJ.

Using the State Tax Commission guidelines requiring 80% common ownership for transfers between businesses with differing owners, the city of Lansing uncapped the taxable value of the building. This resulted in an increase in taxable value of $66,454, so TRJ & E appealed the uncapping.

In TRJ & E Properties LLC v City of Lansing, the Michigan Court of Appeals agreed with TRJ & E, holding that the transfer qualified for the commonly controlled exemption.

Specifically, the Court of Appeals declined to follow the State Tax Commission’s 80% overlapping ownership guidelines, reasoning that what mattered most was the actual control the overlapping owners had in each entity — in other words, whether they had sufficient voting power to control the companies. For both companies, only the affirmative vote of a majority of the ownership interests was required to take action, which the three brothers had with their 75% and 60% ownership interests, respectively.

The Court of Appeals further reasoned that holding at least 50% ownership also is not necessarily the test. Instead, what matters is the company’s corporate governance structure — who actually controls each legal entity. In other words, who has the actual power to direct the entity or its management to take action? This determination must be made on a case-by-case basis.

Since the Michigan Supreme Court recently declined to review this case, the Court of Appeals decision is final.

Pre-transfer common control analysis

Because uncapping of property tax values can be very expensive, it is important to determine before a transfer whether the transfer of ownership qualifies for this commonly controlled exemption.

For that reason, families looking to transfer ownership of business real estate to the next generation or businesses planning to transfer real estate as part of a reorganization or other corporate transaction should first engage in a legal analysis of who has the actual control of each of the entities to ensure the transfer qualifies for the commonly controlled exemption.

Angelyn M. Justian is an attorney with the law firm Warner Norcross + Judd LLP who concentrates her practice on corporate, family business and real estate law. She can be reached at

Facebook Comments