by Jeanne Vogt, Senior Fiscal Consultant
and Jessica Cook, Director | Fiscal Consulting
Minnesota’s complex property tax system was revisited in the last legislative session with the goal of making affordable housing more affordable and reducing property tax burdens for homeowners and farmers. The legislature adjusted tax capacity rates for affordable housing and raised market value exclusion limits for owner-occupied homes and homesteaded agricultural property. These changes, which take effect beginning with taxes payable in 2025, will lower your community’s tax base (tax capacity) and shift the property tax burden to higher-valued homes, market-rate rental property and commercial/industrial property.
In this article, we’ll focus on the adjustments to the affordable housing (4d) tax capacity rates and new requirements for Truth In Taxation Notices this fall. We will cover the changes to the homestead market value exclusion and the increase in the agricultural homestead land first tier limit in our December newsletter.
First, to understand the impact of changing the 4d tax capacity rate, it’s helpful to review how local property taxes are calculated in Minnesota. To convert a property’s taxable market value to property taxes owed, you:
- Multiply the taxable market value by the statutory tax capacity rate to get the tax capacity; then
- Multiply the tax capacity by the community’s local tax rate to determine taxes owed for that property.
A property’s statutory tax capacity rate depends on its classification. For example, a $500,000 home will have a lower tax capacity rate than a than a $500,000 commercial property, and thus pay less in property taxes. Current and future tax capacity rates for several property types are listed in the chart below:
Qualified affordable rental housing currently has the lowest tax capacity rate. The Legislature further reduced the tax capacity rate for affordable housing for taxes paid in 2025.
Affordable Housing 4d Tax Capacity Rate Adjustment
Currently, qualifying low-income rental housing has a two-tiered tax capacity classification. The first $100,000 of market value per unit (adjusted for inflation) has a tax capacity rate of 0.75%, while value above $100,000 carries a tax capacity rate of 0.25%. These rates only apply to the qualifying units within a property, which means those units must be both rent and income restricted. There are approximately 3,800 parcels statewide that contain 4d affordable housing property, the total market value of which is $9.2 billion.
In 2023, the legislature did away with the 4d classification and instituted two new classifications. The first new classification is 4d(1) which replaces the existing 4d classification for qualified affordable rental housing. The new tax capacity rate for 4d(1) properties is 0.25% for all market value. This will result in a lower tax capacity and lower property taxes paid by affordable units.
Example: A 60 unit apartment building where 100% of the units are qualified affordable housing:
Property owners must use the property tax savings for one or more eligible uses including maintenance, security, property improvements, rent stabilization, and increases to the property’s reserve account. Compliance with this provision will be monitored by Minnesota Housing.
Two special provisions were enacted for cities whose total tax capacity from 4d(1) properties exceeds 2% of the total net tax capacity of the city. First, these cities must provide approval via resolution for any new 4d properties within their city. Second, they are eligible for two years of transition aid from the State to partially offset the lost tax revenue. If you are one of the 37 Minnesota cities who exceed the 2% limit, contact your Ehlers municipal advisor for a calculation of the transition aid.
The second new tax classification is 4d(2), which was established for owner-occupied housing on land owned by a municipal or non-profit community land trust. The Minnesota Department of Revenue estimates there are 1,400 qualifying 4d(2) properties valued at $350 million of total market value in Minnesota. The new 4d(2) properties will have a tax capacity rate of 0.75%.
These changes to affordable housing tax capacity rates will reduce communities’ total net tax capacity. When total tax capacity goes down, the tax rate will go up, even when levying the same amount. In addition, the property tax burden will shift to other property types. This can make it seem like government spending is up, even if there is no levy increase. To mitigate this perception, we recommend that comparing the overall levy increase to prior years in budget discussions, rather than focus exclusively on changes to the tax rate.
Truth-In-Taxation Notice Information
Beginning this fall, a statutory change in the supplementary information that must be provided with the Truth-In-Taxation Notice goes into effect. Under previous law, a separate statement of summary budget information had to be sent, whereas the current law eliminates the need for the summary budget and instead requires comparative levy information to be sent for each taxing entity. View an example of the Proposed Property Tax Statement for Taxes Payable in 2024.
While the reasoning for providing this comparative levy information is clear, it may prove challenging for some jurisdictions. A common misperception, and an easy assumption for taxpayers to make when reviewing their property tax statement, is that an increase in the levy results in an increase in funding for that jurisdiction. For example, school districts may see a change in the mix of funding for some sources that are equalized, resulting in shift from state aid to local property taxes with no net-new funding. While you typically present this information during your annual TNT presentation, you’ll want to be prepared for a few more calls or e-mails asking why your levy is changing!
In addition, we recommend working with your County property tax professionals early to be sure you provide the information they need to send out the new statements. For more information, please read the League of Minnesota Cities article.
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