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Tax audits for homesteads

By Katie Deska
News staff
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11/22/2016 - Owning a home provides many benefits, from the pride in having a place of your own, to being able to take a deduction on your annual tax return. One responsibility of home ownership is paying property taxes to your municipality, which includes funds to the state which come back to local school districts as per-pupil funding. When the home is your primary residence, homeowners pay the municipality's annual millage rate. However, if the home is a second, or other non-primary residence, the non-principal residence tax can run up to 18 mills, depending on the approved millage for the district.

When the home is the principal residence, homeowners – those who own and occupy their home – can file a principal residence exemption (PRE). In state audits, approximately 99 percent of PRE filings are found to be valid. However, there are thousands of tax exemptions that are denied at the municipal or county level, as well as during the audit led by the Michigan Department of Treasury. Which means that there are hundreds of thousands of dollars the state, local municipalities and school districts are missing out on.

The PRE became available in 1994, as a result of the passage of Proposal A, a statewide effort designed to cut and cap local property tax burdens, and to gradually reduce the disparities in school funding, and provide tax relief to property owners.

"It essentially changed, to a great effect, the percent of education revenues coming from property taxes, and shifted it over to sales tax," said Andy Meisner, Oakland County Treasurer.

Governed by the regulations established in the General Property Tax Act, to claim a PRE the homeowner/occupier must file a form with the local municipality, at which point the exemption information is posted to the local property tax roll. Second homes, vacation homes and income property may not be claimed because they do not serve as an individual's principal residence.

Additional exclusions to the exemption, and/or grounds for denial, include claiming a similar exemption, deduction or credit on a property in another state that has not been rescinded; claiming the PRE for another property for the same tax year; and filing income taxes as a resident in a state other than Michigan. Exclusion also applies in cases where the homeowner or their spouse owns property in another state – for which an exemption was claimed – unless, that person and their spouse file a separate income tax return.

Under the changed tax structure, which has been the norm for over 20 years, the school operating millage applies only to non-principal residence properties, such as a cottage up north, or a second home that an individual owns and leases as a rental property. While property taxes account for a smaller percentage of the local school operating budgets as a result of Proposal A, the school operating millage continues to be the most significant source of operating funds.

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