Tax exemption for owners renting part of their home

If a Michigan homeowner rents out part of their home, can the homeowner still claim 100% Principal Residence Tax (PRE) exemption on the home? Yes, said the Michigan Court of Appeals in Keith W. DeForge vs. Township of Allouez, decided May 26, 2022. The DeForge Court ruled that renting rooms in the taxpayer’s residence on Lake Superior did not prevent the taxpayer from getting a 100% PRE. The PRE grants an exemption for a principal residence from Michigan school operating taxes, which can reach 50% of the total tax rate.

The taxpayer rented three bedrooms in his house through Airbnb, which constituted 30% of the property, and the lower court (the Michigan Tax Tribunal) therefore granted a 70% PRE exemption. The Tribunal based its conclusion on MCL 211.7cc(16), which states that if the principal residence is part of a unit in a multiple unit dwelling or a unit in a multi-purpose structure, the exemption is limited to only that part of the total taxable value of the property used as that owner’s principal residence. Mr. DeForge appealed this decision.

The Court of Appeal concluded that renting out part of a house did not make it a “multiple use” structure and distinguished this pattern of fact from examples such as a property having a storefront downstairs. floor and a residence above. The court concluded that the “purpose” of the whole property was not changed by the part used for rental, because allowing passing guests to stay in one’s house is not a sufficiently distinct purpose.

The appeals court also referred to an earlier decision, Rentschler v Melrose Twp, 322 Mich App 113 (2017), which found that a ratepayer’s rental of his entire home for more than 14 days a year but less than 50% of the time did not disqualify them for a 100% PRE, and concluded that “[if] fully renting a principal residence for part of the year does not disqualify it from PRE, we cannot conclude that renting part of the property for part of the year would make the owner ineligible for PRE.

why is it important – Many landlords today generate additional income by renting out part or all of their space through accommodation sites such as Airbnb and VRBO. While the sales and lodging tax regulation and treatment of these rentals in Michigan continue to evolve, this case at least clarifies that these rentals do not result in a proportional reduction of Michigan’s PRE.