Short-term rental property taxation in Minnesota is in turmoil as county assessors statewide come up with their own system for classifying properties under their primary use.
The problem, says State Sen. Tom Bakk (DFL-Cook), is that the Minnesota Department of Revenue has thus far failed to provide a definition of primary use.
While county assessors are tasked with classifying individual parcels for property taxes, a memo distributed by the Minnesota Department of Revenue last May advised review of residential properties being used as short-term rentals and verification of the property’s primary use, but it failed to provide clarification on how to make primary use designations.
Counties throughout the state are customizing their approach as they attempt to get a handle on the growing number of short-term rentals, creating further confusion and dissention between counties and property owners.
Bakk introduced a bill into the Senate last month at the request of Cook County officials. However, he says that he is not fully in support of the current version of that bill.
“What’s going on in this industry is not what the legislature intended. This is a new business model that needs its own classification,” he said.
Seasonal recreation, primary residence and commercial properties are the current tax classifications.
It is anticipated that the Minnesota Legislature will ultimately create a new class for short-term rentals (STRs) that will put them in a different market sales category, thus diminishing their impact on tax valuation for other nearby properties.
“The thing that bothers most about this is that lake property has exponentially gone up in value. As value goes up, it’s pushing prices up on every property for people who have just a traditional cabin,” Bakk stated.
Identifying how many STRs there are has been a difficult task, dependent on how each assessor’s office defines them. In Lake County the Assessor’s Office has their own take on the situation. If a STR in Lake County has four or more reviews on an online rental platform, they will be deemed commercial properties.
“We have to figure how many are in the business of making money, and who is just renting when they aren’t using it to help with their taxes,” Bakk said.
Cook County’s proposed bill would raise taxes for stand-alone cabin owners, and Bakk says that’s a non-starter for him.
“I don’t support raising taxes on traditional cabins, but I introduced the bill to start the conversation because we have to start somewhere on this complicated topic,” he said.
Bakk believes there is no clear consensus on how this will all play out, but for some percentage of properties that will ultimately likely be classified as commercial, there is certain to be blowback.
“Some people will be angry about their taxes going up, but they’ve had a really good deal for a long time. I’m sympathetic because they do serve the tourism industry, but if they are producing income, we should find that sweet spot and they should be taxed in fairness to everyone,” Bakk said.
Cook County has decided to count a property’s primary use as commercial if it is rented for 183 or more days out of a year, and as seasonal recreational if rented for 182 days or less in a year.
In the Minnesota House, Rep. Rob Ecklund (DFL-International Falls) has introduced a companion bill. Both bills had been scheduled for hearings but were delayed.
“Vacation rentals have changed the whole picture. I think in the end there will be a lively debate on this, especially from high tourism areas in the state,” said Ecklund.
While Ecklund says that the tax classification has to take priority, other considerations as STRs grow in popularity must also be addressed, such as how to regulate unruly behavior of visitors to STRs and noise complaints. Ecklund raised the issue that STRs currently may not be appropriately set up to handle issues in compliance with environmentally appropriate expectations.
“It concerns me that a lot of these short-term rentals are cabins or family homes that are not designed with septic mounds to handle larger groups of people. There is an environmental consideration there, too,” said Ecklund.
Even with all the disentangling yet to be done, Ecklund posits that STRs are a necessary addition to a functional tourist market.
“These short-term rentals are springing up because of a need in the tourism industry. Even though they compete with some resorts, we don’t have enough rooms, and the need is out there,” Ecklund stated.
Rick Goutermont, Lake County commissioner, says that while the issue is a complicated one, he firmly defends homeowners with modest and fixed incomes.
“My strong opinion is that I don’t want to see residents over-taxed. A property that produces income should be paying a higher tax than a homeowner, and if you give them a tax break, that burden should not get distributed across homesteading homeowners in Lake County who don’t have the luxury of having a second property,” Goutermont stated.
Still, Goutermont does see room for degrees of taxation, such as cases where homeowners are renting a room or part of the space they are living in full-time.
“There’s some wiggle room in there and I’m not necessarily in full agreement with how we are classifying this because there’s some hotels that don’t rent some of their rooms for large parts of the year, but our concern with legislators is that it needs to be consistent in each county whatever is decided,” said Goutermont.