Tax Audits Nabs Owners of Second Homes for Improper Exemptions

Michigan Treasury Department officials are going after tens of thousands of dollars in tax breaks they say were improperly claimed by property owners with second homes that aren’t their primary residences.

The state audits property owners who claim a 100 percent principal residence exemption, which saves property owners from paying school district taxes in those areas, The Detroit News reported.

The annual treasury audits began in 2005 as a way of determining whether a property owner receiving the exception really owned and occupied the home as a primary residence.

Often, these properties were second homes or summer homes and were not occupied full time, and thus didn’t qualify for this exemption.

Since 2012, the audits have generated $85 million in potential revenue for the state school aid fund plus interest.

Last year, the state denied tax breaks for 10,294 properties after expanding the audits from 48 to 58 counties.

This resulted in an increase of 74 percent increase from 2013.

Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy, said the practice seems to unfairly penalize people who have worked hard to obtain a second home or cottage.

“I don’t think many of them were born with silver spoons in their mouths,” he told The Detroit News.

Beaver Island resident Scott Kasbaum, who owns a century-old cottage and was audited in 2013, was forced to repay more than $7,000 in back taxes.

“It seems like a witch hunt to raise money,” Kasbaum told the newspaper.

For many years Cathy Houlihan and her four siblings were second-generation owners of a cottage built by hand in the 1970s by their father along the Lake Michigan shoreline.

“We’re up on a bluff and you can feel the wind blowing with the water down below us,” Houlihan, 61, told The Detroit News. “It’s a fun place. It’s just ingrained in my DNA.”

Houlihan said her family lost the tax break in 2014, the year after her mother who had lived there year-round, died. As a result, property tax on the cottage soared 273 percent – fto $9,509 in 2015 from $2,552 the year prior.

“It’s been a hardship and we’ve made some major adjustments throughout the family to make this work,” Houlihan said. “This is my piece of heaven.”

In some cases, many of those vacation homes are located in some of Michigan’s most desirable destinations and owned by some of the state’s wealthiest residents, including several who are among the world’s richest people, including members of the DeVos and Stryker families.

State officials justify the tax audits as a way to ensure the integrity of the tax-collection system.

“It’s partly about the integrity of the tax-collection system itself, but it is a revenue generator that collects money the school aid fund should have gotten,” Larry Steckelberg, administrator of the Treasury Department’s property services division, told The Detroit News. “The most important thing is sending a signal that the integrity of the system is important and you should follow the rules.”

Image: Christine via Flickr / Credit Commons