New property tax classification for rentals could mean big ripple effects for everyone
Property tax reclassifications will result in financial ripple effect on residents, businesses and travelers. Will the loss in local revenue, jobs and sales tax far exceed the gain in property tax revenues?
This issue has become a hot topic in Otter Tail County. Should property owners who rent their cabins be subject to higher property tax?
Mike Skoglund wrote an interesting article in the Star Tribune on 3/6/20. It’s a story that many Minnesotans can relate to. He wrote about his family cabin, built by his grandfather in the 1930s, and how through that cabin, he developed a strong connection to its local area. As an adult, he and his wife bought their own property nearby and eventually added a three-bedroom cabin. They routinely visited their cabin, but when they weren’t using it, they started renting it to other families so they could use that little bit of income to make improvements. More importantly, so these other families could also experience the wonders of cabin life.
For those of us who grew up with a family cabin, we never knew how good we had it. Just think of the number of Minnesotans who have never had that opportunity. Short-term rentals are the only way many families will ever be able to have that experience. Our resorts are slowly fading away, with resort owners finding it much more lucrative to sell the land than operate a resort. While they can’t be faulted for doing what’s best for them financially, it leaves a huge shortage in accommodations in our lakes country areas.
Last year, the Minnesota Department of Revenue directed county assessors across the state to consider reclassifying cabins that are used as short-term rentals from seasonal recreational to commercial. This would double or even triple the property tax bill for vacation homeowners who sometimes rent their cabin to tourists.
Skoglund said “For communities like Grand Marais, Detroit Lakes and Brainerd — welcoming places that are gateways to some of the most beautiful parts of Minnesota — the impact will be devastating.”
I have to agree. The increase in property tax revenue may come with a huge ripple effect for everyone inlcuding:
Property owners will have to raise their rental prices
Home buyers who plan to buy and off-set expenses through rentals will opt to buy in counties that are not implementing new tax classifications, which will inevitably lead to lower property values in counties who are planning these new property tax hikes
Tourism will slow in affected counties causing loss of income for local businesses, loss of seasonal employment for residents and loss of sales tax revenues for local government
Property owners who choose to rent their cabins are already paying higher property insurance rates plus local inspection and permit fees. The more pressing issue should be that they are collecting a remitting sales tax and if using a property manager, they are licensed by the state to do so. In the state of Minnesota, a property manager must operate through a licensed real estate brokerage who holds rents in a separate trust account and must collect and remit sales tax on behalf of their property owners for short-term rentals. If you rent your property 14 or more days per year, the income you receive is taxable. Imposing property tax increases will only push those owners/property managers not following the rules further underground and add incentive to operate illegally.
Skoglund says “I believe it’s fair to ask cabin owners to pay a little more in property taxes because they receive rental income. But we shouldn’t tax them as if they were a Walmart or some other large business, which is what is starting to happen in some counties. That is why I hope you will encourage your state lawmakers to support legislation that addresses this issue (HF 3826 and SF 3931). The proposal offers a middle ground for condos and cabins available for rental by creating a new property tax classification that falls between seasonal residential recreation and commercial. Let’s be smart and figure this out before we damage one of Minnesota’s great legacies — family access to outdoor living and recreation.”
What other ways could we support local goverment, local residents, local businesses and continue to make cabin vacations affordable and possible for ALL Minnesotans? Many Minnesotans do not own a first home and certainly cannot afford to purchase a second home. Perhaps we need to think this through before we implement any new tax revenue ideas.
The loss in local revenue, jobs and sales tax could far exceed the gain in property tax revenues.
Jenny Hilton, Broker/Realtor, Cabin Source Realty & Vacation Rentals. (612)834-0079
Excerpts from Mark Skoglund, of Cambridge, Minn., who is co-owner of Uncommon Loon Brewing Company in Chisago City. The full Star Tribune article written by Mark can be found at www.startribune.com/keep-it-possible-for-minnesotans-to-rent-out-their-cabes/568573572/