Some cabin and vacation property owners in Minnesota who rent out their places for part of the year could face a steep hike in property taxes, depending on where they own and how often they rent.
County assessors across the state are scrambling to address a conundrum as the short-term rental market continues to proliferate: At what point does a vacation rental become a commercial property — and get the higher tax bill to show for it?
As they consider assessments for next year, several assessors recently sent questionnaires to property owners who have listed their places on websites such as Airbnb and VRBO, seeking details on how often those properties are used and by whom.
But depending on the county, assessors are employing different formulas to draw the tax lines, potentially jacking up bills for certain vacation property owners in some counties but not others.
Anxious property owners, tourism industry leaders and local officials — many in the heart of Minnesota’s cabin country Up North — are hoping legislators come to the rescue with clear direction for uniformity early next year.
“It’s going to have a big impact on our economy,” said Jim Boyd, executive director of the Chamber of Commerce in Cook County, in northern Minnesota’s Arrowhead region. “For a county whose economy is almost totally dominated by tourism … it’s not fun and games. This is serious stuff.”
Properties in Minnesota fall into one of dozens of classifications for tax purposes, but some assessors have found there is no clear category for rented-out vacation homes. Many have been considered seasonal/recreational properties — meant for family cabins, and offering one of the lowest rates in the state system. But across the nation, hotel and motel industry representatives have said they are increasingly facing competition from such rentals and want a level playing field for property taxes, regulations and licensing.
Property’s ‘primary use’
After assessors asked for guidance, the state Department of Revenue put out a memo this year saying classification depends on the property’s “primary use.” If the primary use is short-term rental, then it aligns with commercial classification, according to a chart on the state’s memo.
But county assessors are responsible for defining what “primary use” means.
While trying to offer consistency throughout the state, “what the department can’t do is say to particular assessors, ‘This property needs to be classified in a certain way,’ ” state Revenue Commissioner Cynthia Bauerly said in an interview. “Statute provides that the assessors have the authority” to determine classification based on use.
But assessors are interpreting that differently.
Some say that if a cabin is rented out more days than the owners are occupying it, not including the days it is vacant, it should be classified as commercial. Others say commercial classification is appropriate if the place is rented more than half the year — 183 days or more. Others may look to a state resort classification with a threshold of more than 250 days.
Lodging industry officials know the issue is complex and want robust tourism throughout the state, though they want fair taxes and regulations, too, said Ben Wogsland, spokesman for Hospitality Minnesota, which represents hotels, motels, resorts and campgrounds.
“You could make a strong argument that these units don’t really fit into any of the current property tax classes,” Wogsland said, “and that Minnesota needs a new property tax classification for these, or at least some sort of standards or tiered standards.”
In Cook County, where a previous assessor changed vacation rental properties to a slightly higher-rate residential non-homestead classification last year, current assessor Bob Thompson said he has landed on the 183-day threshold for changing properties to commercial, based on the revenue department’s memo.
‘Cascading events’ a concern
That is good news for Milan and Nancy Shipka, who bought a lake place a decade ago on Lake Superior. The professor and retired teacher fell in love on the North Shore and now, even though they live in Alaska, spend up to two months a year in their cozy two-bedroom Minnesota cabin, Milan Shipka said. The rest of the time they offer it up as a vacation rental.
Though the number of days they rent it varies each year, they recently rented it for just under the 183-day threshold, Milan Shipka said.
The couple paid $4,850 in taxes this year under the seasonal-recreational classification assigned to their place. If it were changed to commercial, their bill would jump to an estimated $13,350, Thompson said.
Milan Shipka said they don’t view their cabin as an investment property. The money they get from renting it out helps offset ownership costs. “It has not provided a positive income, I’ll say that,” he added.
The Shipkas will be sure to hold the number of days rented to under 183 now, he said, but warned that will mean fewer dollars flowing to people who clean and maintain the place.
The Shipkas rent out their cabin through Cascade Vacation Rentals, a local business that has been managing people’s properties for decades.
Cascade co-owner Mike Larson said he’s had several property owners call to say they are thinking about removing their properties from the rental program. A few are contemplating selling their places if higher taxes eat more of their rental income, they told him.
“Those are the cascading events that I’m concerned about,” Larson said. “You’re going to see cascading values, less heads in beds, which means less people at the restaurants, wineries, ski areas, golf courses.”
Dennis Rysdahl, the majority owner in the AmericInn hotel in Tofte, as well as owner of a company that rents and manages privately owned condos at Bluefin Bay, argues that his hotel’s assessed value is based on economics, while second homes are valued on their estimated resale price.
The AmericInn pays about $58,000 in real estate taxes — roughly 5.5% of its gross income, he said. A typical one-bedroom at Bluefin that earns about $50,000 in rental income pays about 5.1% of its gross sales as a seasonal recreation property. If it were reclassified as commercial, the tax would increase to nearly 15%, he said.
“The whole fairness issue falls completely apart,” he said. “They don’t work as an investment in the same way.”
A frustrating issue
Assessors agree the varied interpretations may be frustrating to people.
Otter Tail County Assessor Doug Walvatne said he is viewing “primary use” as commercial if a place is rented more days than it is owner-occupied. The days that a place sits empty aren’t counted.
“It’s classified based on the actual use, so that’s what we would look at,” he said.
Gary Griffin, the assessor in Crow Wing County, covering part of the Brainerd Lakes area, is going with what he calls the least aggressive approach, similar to Cook County — changing to commercial classification only if a property is rented more than half the calendar year.
“If it’s [a property owner’s] personal belongings inside a house, we’re not going to argue they didn’t use it personally,” Griffin said.
Some industry officials hope the Legislature finds a better solution. Legislative changes can be made retroactive, so assessors’ decisions now could be nullified later.
In Cook County, community leaders are discussing options to suggest to state lawmakers.
Sen. Paul Gazelka, R-Nisswa, said his office has received many calls from concerned property owners and real estate professionals.
“Both homeowners and resorts that have done some of this activity are concerned about what might happen,” said Gazelka, who has been discussing the issue with other lawmakers. “It changes all the rules midstream as far as they’re concerned.”
Gazelka said he and Sen. Tom Bakk, DFL-Cook, are trying to find common ground.
“If it’s something we agree on both sides of the aisle … likely it would be something that would come to pass,” he said. “I’d rather have clarity at the state level.”