In 1994, voters in Michigan amended the Michigan Constitution with Proposal A. In short, property taxes could not increase annually by more than five percent (5%) or the rate of inflation, whichever was less. Until the recent housing market crash, property values increased markedly more than the rate of inflation. At the height of the housing boom, the difference between assessed value and taxable value was significant and homeowners were paying taxes on a value much less than the actual value of their home for several years.
The housing market crashed with the economy in 2007, resulting in declining property values. Unfortunately, the Proposal A legislation did not include provisions for a declining market. Homeowners were confused on how their property values could be declining (based on market information) and their property taxes increasing (based on rate of inflation). Property values bottomed out in 2012 and started recovering in 2013.
Assessments are based on area market data. Market data includes analyzing sales information as well as determining the replacement cost of your home. If your property is a rental, income and expense information is evaluated. The Michigan General Property Tax Act requires properties to be assessed at 50% of true cash value. Proposal A did not change standard assessment practices, but in fact, created another value for your taxes to be based on. Taxes are based on "taxable value" not on the assessed value.
Taxable value is the lesser of either capped value or State Equalized Value (SEV). The capped value is the lesser of 5% or the CPI (Consumer Price Index). If there was a property ownership transfer, the value will be uncapped and the SEV and the taxable value will be the same.
When you receive your assessment notice, your taxable value is the figure your taxes will be based on. The assessed value still should be 50% of market value, and does not come in to play until there is a transfer of ownership. When ownership is transferred, the valuation is "uncapped". The SEV is the new starting point for the buyer and the capping process starts all over again on the property until another transfer of ownership occurs.