Sometime in November of last year, State Senator Tom Bakk met with Governor Tim Waltz to warn him “something was bubbling up.” suggesting the new look of the vacation rental industry warranted a “fresh look at state tax laws.”
Eleven years previous, during the 2008 Minnesota legislative session, a task force actually set about to study the need to create a state level policy with regard to short-term rentals. The committee looked at property tax classification, Minnesota Department of Health regulation and local level issues such as zoning, nuisance complaints and neighborhood density issues.
While the task forth seemingly put forth the effort, in the end, they made no recommendations on how to classify the use of these properties for property tax purposes.
It could be Minnesota’s property tax laws were already too difficult to navigate, given property taxation in Minnesota is said to be the most complex property tax system in the country with roughly fifty-five classifications on the books as it stands. (The average number of classifications per state is usually five with South
Dakota having the next highest with 14 classifications.)
In June 2013 the Department of
Revenue Information and Education section offered an opinion on a question posed regarding short-term rental activity. The opinion was that 3a Commercial was the appropriate classification without giving any thresholds for lease lengths or days/types of use.
Case law appeared to solidify this opinion: June
2014 T.C. Hewitt LLC versus McCloud County.
The petitioner challenged a 3a Commercial classification which was the result of short-term rental activity. With detailed data regarding the primary and additional uses, the tax court upheld the 3a Commercial classification.
The Department of Revenue reiterated their 2013 opinion in June 2018 stating that 3a Commercial could be appropriate if the primary use is short-term rental.
Political reporter for MPR News, Brian Bakst, in a December 2019 article titled, “In cabin country, rental property could get new tax treatment,” quotes Mike Larson, who runs Cascade Vacation Rentals that manages about 170 properties owned by other people in the North Shore region. Larson said, “the answer isn’t to make what he considers an extreme tax rate swing–from seasonal recreational to commercial. He hopes policymakers find a middle ground that keeps cabin owners or renters from being priced out.”
Jessica Lee reported in a June 2019 MinnPost article that Minneapolis City Council members were wrestling with the same issue; discussing if, or to what extent, they should limit the number of such rental accommodations in the city and enforce new taxes on them as the presence of short-term rentals in Minneapolis grows.
Minneapolis Council Member Steve Fletcher said the changing trend goes against Minneapolis’ efforts to alleviate a lack of housing. “That was a big red flag because we have a shortage of housing for people.”
Welcome to Cook County!
Minneapolis has 302 active licenses or registrations for short-term rental properties of all kinds. According to Cook County Assessor Bob Thompson, there are about 600 seasonal recreational properties at issue in Cook County.
If a commercial classification is deemed appropriate, the property tax implications are substantial and all investors should be made aware of the potential impact.
As a way of showing the tax implications, the 2008 task force report provided these figures.
Example: $222,300 Townhouse in Lutsen
Former Cook County Commissioner Garry Gamble is writing this ongoing column about the various ways government works, as well as other topics. At times the column is editorial in nature.
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