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Principal Residence Exemption For Homeowners Renting a Portion of Property Short-Term

Jul 14 | 2022  by

As outlined in a previous article covering Rentschler v. Township of Melrose, the case law in Michigan regarding Principal Residence Exemptions (PREs) and short-term rental properties has been clarified in the last few years. In Rentschler, the courts determined that renting your property on Airbnb for more than 14 days does not render you ineligible to claim a PRE and that the definition of “principal residence” does not restrict an owner from renting and still being eligible for a PRE. Recently, in May of 2022, the Michigan Court of Appeals elaborates even further on the matter of principal residence exemptions as they relate to Airbnb.

Deforge v. Allouez Township

In Deforge v. Allouez Township, the Michigan Court of Appeals builds upon Rentschler by providing further clarification on the eligibility for PREs. A property owner in Keweenaw County, Michigan had applied for and received a PRE in 2018, but had it revoked in 2020 on the basis that the property was determined to be a rental property. It was determined that over 50% of the property was used as an Airbnb, which the township concluded disqualified the property from receiving the exemption.

The owner appealed to the Michigan Tax Tribunal (MTT), which concluded that only 30% of the property was used as an Airbnb – using “square footage rented” to determine that percentage – this resulted in a judgment of 70% PRE for the owner. The owner then appealed to the Michigan Court of Appeals, arguing that the Tribunal erred in its analysis and they should receive a 100% PRE. The township’s argument centered around the property being considered a “multi-purpose structure.” This determination was based upon MCL 211.7cc(16), which states the following:

If the principal residence is part of a unit in a multiple-unit dwelling or a dwelling unit in a multiple-purpose structure, an owner shall claim an exemption for only that portion of the total taxable value of the property used as the principal residence of that owner in a matter described by the Department of Treasury.

Using this basis, the MTT concluded that the subject property is a dwelling unit, and utilizing a portion of the dwelling as an Airbnb is considered to be a multi-purpose structure, thus a 70% PRE-determination was granted. The township illustrated comparable examples of multi-purpose structures, such as a storefront with an upstairs flat, to which a 100% exemption is not applicable. However, the court concluded that using part of the property for short-term use did not render it a “multi-purpose structure.” The court reasoned that it “simply does not see that allowing transient guests to stay in one’s home is being a sufficiently distinct purpose to lead to the conclusion that the structure now has multiple purposes.”

The appellate court relied on Rentschler’s case precedence to conclude that if renting out the entire residence for a portion of the year did not disqualify it from the PRE, then renting out a portion of the property for a part of the year does not disqualify the owner from claiming the PRE. The court ultimately concluded that where a property otherwise qualifies for the PRE, the fact that a portion of the property is rented out for a part of the year as an Airbnb or similar use does not necessarily disqualify it from a 100% PRE.

Principal Residence Exemptions: Ask a Michigan Real Estate Attorney

With rapidly changing case law and complex eligibility requirements for a PRE, it is best to consult with an experienced Real Estate Attorney if you are a property investor or Airbnb operator interested in applying for a principal residence exemption.

If you have any questions about your PRE eligibility, the knowledgeable team at Fausone Bohn, LLP can help. Call Business and Real Estate Associate Robert C. Pollock at (248) 912-3213 for a free consultation.