Tax dragnet on second homes snags billionaires, others

Robert Snell
The Detroit News

Thousands of summer cottages and second homes in Michigan have lost a valuable tax break in recent years amid state Treasury Department audits aimed at cracking down on improper exemptions.

Above: Trevor MacMeeken and his children, Cal and Lucy, enjoy time at their cottage with his mother, Colleen Mac Meekin, and aunt, Cathy Houlihan. The New Era house was built by their parents and has been in the family for decades. Right: The state partially denied a tax break for Dick and Betsy DeVos’ $7.8 million compound in Ada Township.

The dragnet has snared a wide range of property owners, from small-time landlords in Detroit to west Michigan billionaires with multi-acre compounds, according to data obtained by The Detroit News.

Amway heir Dick DeVos and wife Betsy, and Jon Stryker, an heir to the Stryker Corp. medical devices fortune, are among 23,800 property owners ordered to pay more taxes following state audits since 2013, the data shows.

The audits target properties that claim a 100 percent principal residence exemption. The tax break saves property owners from paying school district taxes up to 18 mills.

The number of homes stripped of the tax break has spiked 74 percent in recent years, a move that has generated $69.2 million in additional school revenue. But the audits have sent tax bills soaring for thousands of property owners and prompted complaints that residents are being targeted by a cash-strapped state government.

“It seems like a witch hunt to raise money,” said Beaver Island resident Scott Kasbaum, 54, who said he was forced to repay more than $7,000 in back taxes, interest and penalties after his nearly century-old stone cottage was audited in 2013.

The annual audits were instituted in 2005 to determine if a property owner receiving the tax break really owned and occupied the home as a primary residence. In numerous cases, residents did not live in the home full time and lost the tax break on rental properties and vacation homes in some of Michigan’s most desirable destinations.

Interactive map: Residential tax break denials since 2013 in Michigan

The list of properties includes some of the most expensive real estate in Michigan, stretching from the Upper Peninsula to Detroit and in beach towns along Lake Superior, Lake Michigan and Lake Huron.

Since 2006, state contractor Tax Management Associates Inc. has conducted the audits. Last year, the audit reviewed 4.2 million parcels in 58 of the state’s 83 counties. Local and county departments audit the remaining counties.

The state focuses on individuals who own more than one parcel but receive exemptions on all of the properties, land owned by entities such as a limited liability company and nonresidential parcels.

Last year, the state denied tax breaks for 10,294 properties – a 74 percent increase from 2013 – after expanding the audit from 48 to 58 counties.

The state rescinded principal residence exemptions last year for several reasons, including because the owners did not occupy the residence or because the home was a rental.

Property owners can appeal, but face long odds. In 2014, there were 894 appeals but less than 24 percent succeeded in at least partially overturning the state’s decision.

The audits cover the current tax year and three prior years. If property owners lose the tax break, they can be ordered to pay back taxes, interest and penalties.

The 2016 audit is underway and already has resulted in the state denying tax breaks for more than 1,000 properties.

The state partially denied a tax break for Dick and Betsy DeVos’ $7.8 million compound in Ada Township.

The state defended the audits, calling them 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,” said Larry Steckelberg, administrator of the Treasury Department’s property services division, which oversees the audits. “The most important thing is sending a signal that the integrity of the system is important and you should follow the rules.”

Wayne County has the largest number of properties that have lost the tax break in recent years. Since 2013, the state has denied tax breaks for more than 6,700 properties.

More than half were in Detroit. That reflects the large number of rentals, foreclosures and homes abandoned by people leaving the city, Detroit Deputy Chief Financial Officer/Assessor Alvin Horhn said.

Removing the tax breaks is having an unintended consequence in Detroit, he said.

“Homes and neighborhoods are safer when people who own the home live there,” Horhn said.

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

“It seems unfair to dun people who have, in many instances, worked hard to obtain that second home or cottage,” said Michael LaFaive, director of fiscal policy for the Mackinac Center for Public Policy. “I don’t think many of them were born with silver spoons in their mouths.”

Several property owners are heirs to some of the largest fortunes in the world.

On Dec. 10, the state partially denied a tax break for Dick and Betsy DeVos’ $7.8 million compound on 100 acres in Ada Township, near Grand Rapids. The compound includes a 17,000-square-foot home, 12,000-square-foot tennis club and a convention center.

The state denied part of the tax break for that year because the property was used for another purpose, such as a business or rental, according to the denial notice.

Dick DeVos ran unsuccessfully for governor in 2006 and his family is the 84th wealthiest in the United States with an estimated $5 billion net worth, according to Forbes magazine.

Based on 2014 millage rates, DeVos and his wife would have saved an estimated $4,000 with the tax break. Last year, the couple paid $77,300 in property taxes for the compound.

The same day Dick DeVos received a denial letter in December, his brother, Amway President Doug DeVos, got one, too.

The state stripped Doug Devos and wife Maria of part of the tax break on their $5.6 million, 29-acre property in Cascade Township, east of Grand Rapids.

The couple was using part of the property – which includes a 10,375-square-foot home and a 13,886-square-foot stable, equipment shops and an office building – for another purpose, such as a business or rental, according to state records.

Based on the state’s denial, the Treasury Department planned on hiking the couple’s tax bill for the years 2012-15.

It is unclear how much money the couple saved by receiving the tax break. The couple paid $84,206 in property taxes last year, according to township records.

The couple is fighting the state, however, insisting they “always occupied and used 100 percent of the property as their principal residence,” according to state records.

John Truscott, a spokesman for Dick and Doug DeVos, said it is “ridiculous” for the state to think the billionaire brothers are renting out part of their private property or using it as a business.

“They don’t need to rent out part of their houses,” Truscott said. “To save $4,000?”

A year earlier, in November 2014, the state denied part of the tax break for a third DeVos sibling, Dan DeVos. He is chairman of the NBA basketball team Orlando Magic and co-owner/CEO and governor of the Grand Rapids Griffins, a Detroit Red Wings affiliate.

Dan DeVos owns a $7.8 million, 46-acre compound in Ada Township. The compound features a 13,494-square-foot home, underground parking garage, skating rink and beauty parlor.

The state alleged Dan DeVos was using part of the property for a non-residential purpose, such as a business or rental, according to state records.

Dan DeVos fought the state, arguing he always used 100 percent of the property as his principal home. He won and the state reinstated the tax break in December 2015 – a year in which his property taxes totaled $114,154.

DeVos, through a spokesman, declined comment.

The state found more tax problems further down the Forbes billionaire list.

Interactive: Notable properties targeted by the state

In 2014, the state audited Stryker, the Kalamazoo billionaire who is the 327th richest person in the U.S. with an estimated $2.2 billion net worth.

The state rescinded tax breaks on 51/2 acres of vacant land owned by Stryker southwest of the Kalamazoo Country Club. The land did not contain Stryker’s principal residence or meet other conditions, the state wrote in a 2014 letter.

After the state rescinded the tax break, Stryker gave the properties to a nonprofit.

The same year Stryker lost the tax breaks, he sold his New York City penthouse overlooking Central Park for $42 million.

Stryker , a liberal megadonor who has contributed more than $2 million to a super PAC backing Democratic presidential nominee Hillary Clinton, could not be reached for comment.

Two hours north of Stryker’s old Kalamazoo property, cracks in the state’s annual audits can be found in a beachfront colony along Lake Michigan.

The experiences of several property owners atop a bluff in New Era also illustrate the impact the state’s attempt to boost tax revenue has had on generations of family members.

Until recently, Cathy Houlihan and four siblings were second-generation owners of a blue cottage, built by hand in the 1970s by their father, 100 steps above the Lake Michigan shore.

“We’re up on a bluff and you can feel the wind blowing with the water down below us,” Houlihan, 61, a Whitmore Lake marketing assistant said. “It’s a fun place. It’s just ingrained in my DNA.”

Her mother lived in the cottage year-round and received the tax break. In 2013, the year the widow died, property taxes totaled $2,552.

The state audit removed the tax break in 2014 since none of the siblings lived there full time. The move sent property taxes soaring 273 percent – to $9,509 a year.

After losing the exemption, and facing the heftier tax bill, two brothers sold their stakes to the sisters.

Retaining the $381,000 cottage has been a financial burden.

“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.”

Neighbor Thomas Collins was audited by the state three years ago even though the retired occupational physician and his wife live year-round in the 1936 log cabin overlooking Lake Michigan.

Collins figures his $422,000 cottage was targeted because he failed to change his address on state income tax filings after retiring and moving from Allegan.

The oversight cost Collins $11,000 in back taxes, interest and penalties.

Collins, 70, cut a check, appealed and won after proving residency by showing the state utility bills and propane gas receipts for the beachfront home.

The process took a year, he said.

“But I got all my money back,” Collins said. “I legitimately live here.”

Retired state of Michigan scientist John Reynolds built a 3,200-square-foot home south of Pentwater on a bluff overlooking Lake Michigan almost 20 years ago.

The home is worth $857,000 and qualified for the principal residence exemption until last year.

The East Lansing resident claimed the beach house as his principal residence because he planned to make the cottage his retirement home before falling ill and being hospitalized in 2011.

While ill, he lived full time in East Lansing, where property tax bills were sent for the vacation home.

The state audited Reynolds’ vacation home in 2015 and rescinded the tax break back to 2012. Reynolds figures he will pay $8,000 in additional property taxes a year.

“I’m not real sour grapes about it but you hate to shovel more money into the government’s pockets if you don’t have to,” Reynolds, 64, said. “You have to pay the piper, but you don’t have to like it.”

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