Michigan provides tax break for homeowners with roommates

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In a case that could provide a tax break to homeowners who rent a room in their residence to a roommate, the Michigan Court of Appeals recently held that a homeowner that rents a room in their personal residence to a roommate, does not lose the “principal residence exemption” (PRE) available to reduce real estate taxes.

The published case is Wilson v City of Grand Rapids (Mich. Ct. App. No. 358657, February 9, 2023). Generally, the PRE is available to owners of residential property that is their permanent residence to which the owner, whenever absent, intends to return. The homeowner can lose all or part of the PRE if 50% or more of the “total square footage” of the dwelling space is rented or leased. The loss of the PRE can result in a significant increase in real estate taxes for the home.

The Michigan Tax Tribunal had ruled against Wilson and found that the PRE was not available since the roommates had “full access to their own bedrooms and all the common areas of the house…”. This was consistent with current Michigan Department of Treasury Guidelines (PRE Guidelines) on the topic which used a fact scenario similar to that found in Wilson and stated that the PRE would not be available under such facts. Interestingly, prior to August 2022, the PRE Guidelines came to the opposite conclusion; i.e., that all or some percentage of the PRE would be available under these facts.

Although the court reversed the Tax Tribunal and nullified the current PRE Guidelines on the topic, the court expressly limited its holding to the facts of the case and indicated that other fact scenarios may result in different outcomes.

Nonetheless, the case may provide peace of mind to those homeowners claiming the PRE who may have had relied on the prior PRE Guidelines in renting to roommates, only to have the Guidelines changed to their detriment in August 2022. Under the facts of Wilson, and assuming the case is not successfully appealed, similarly situated homeowners can rest in their homes knowing that their roommates will not cost them a substantial increase in their real estate taxes. The case is also a good reminder that the PRE Guidelines are not law, and the interpretations contained in the PRE Guidelines, while a helpful resource, should be reviewed with that in mind.

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