By Jeanne Vogt, Senior Fiscal Consultant
and Jen Chapman, Financial Specialist

Breaking down the impacts of 2023 Minnesota Legislation

In 2023, The Minnesota State legislature increased the market value exclusion for homeowners and reduced tax capacity rates for affordable housing. In addition, by law, the first-tier limit for agricultural homestead land will be increased. Together, these changes will reduce your community’s residential tax base beginning in Pay 2025 and shift the tax burden to other classes of property. While we reviewed the affordable rental housing adjustments in our September 2023 newsletter, we’ll focus on the tax changes for owner-occupied property here.

Homestead Market Value Exclusion Increased

The Homestead Market Value Exclusion replaced the homestead market value credit in 2012 as the tool the state legislature uses to reduce the property taxes on lower-valued owner-occupied homes. Under current law, the homestead market value exclusion reduces the taxable market value for property classified as homestead if it is valued below $413,800. Decreasing the taxable market value of a property reduces the tax burden for a homeowner and shifts the burden to other classes of property such as higher valued homes and commercial/industrial properties.

During its 2023 session, the Minnesota State legislature authorized a modification was authorized to increase the homestead market value exclusion for homesteads to $517,200. The purpose of this revision was to keep pace with increases in home values since 2012.  Over the last couple of years, residential property has seen double digit valuation increases. In fact, the Minnesota Department of Revenue reports that, statewide, the 2022 assessment for the 2023 payable year was the largest increase in aggregate estimated market value for residential property types since at least 2005.  The increase over the prior year was 19.3% in the 2022 assessment year and 7.2% in the 2023 assessment year.  Comparatively, the statewide average increase between 2016 and 2020 stood at 6.3%.

The changes to the Homestead Market Value Exclusion are highlighted in the chart below:

According to the Minnesota Department of Revenue, an additional 53,000 homesteads with values between $413,800 and $517,200 will qualify for the homestead market value exclusion

Agriculture Homestead Land First-Tier Limit Increased

The Minnesota Department of Revenue annually adjusts the first-tier valuation limit for agricultural homestead property, as required by law. Agricultural homestead property includes the “house, garage and first acre” (HGA) and the excess of homestead property is divided into two tiers for determining net tax capacity.

As a refresher on agricultural valuation and taxes, the value of the homestead residence (HGA) is taxed exactly like any homestead as mentioned above and will benefit from the enhancements to the homestead exclusion.  For the remainder of the agricultural property, the two classification rate tiers have been adjusted as shown below:

The Referendum Market Value (RMV) calculation will also be impacted.  The RMV, which is used to determine market value-based taxes, reduces the market value for properties with a class rate of less than 1% to what the value would be at 1%. This means the $1,350,000 increase in the first tier of the “remainder of farm” will reduce the RMV from $1,350,000 to $675,000 for each parcel affected.

All else held equal, the increase in the first-tier value limit for the remainder of the farm can carry a significant tax implication for not only an individual property owner, but local taxing jurisdictions as well.  This large change scheduled for Pay 2025 will not only reduce the overall net tax capacity and RMV for a town, city, county, or school district, but may also cause a shift in property taxes away from these agricultural properties and onto all other properties within the taxing jurisdiction.

With overall market values up again in assessment 2023 for taxes payable in 2024, we expect to see another increase in this limit for taxes payable in 2026.  The formula for determining the tier limits results in a two-year lag between when values change and when the tier limits increase.  Until valuations start to normalize, we will continue to see the delayed agricultural homestead land first-tier limit have an impact on the net tax capacity and cause a shift in the tax burden for many Minnesota communities and school districts. The preliminary Pay 2025 values that include these changes will be estimated this summer by Minnesota’s counties.

Should we continue to see estimated market values increase significantly, there may be sufficient value creation to offset these scheduled reductions in taxable market value.  However, it may be beneficial to communicate these underlying currents and their potential tax rate implications to your elected officials in advance of the next budget cycle.

As always, if you need assistance communicating these legislative updates to your constituents, please reach out to your Ehlers Municipal Advisor.

Important Disclosures:

Ehlers is the joint marketing name of the following affiliated businesses (collectively, the “Affiliates”): Ehlers & Associates, Inc. (“EA”), a municipal advisor registered with the Municipal Securities Rulemaking Board (“MSRB”) and the Securities and Exchange Commission (“SEC”); Ehlers Investment Partners, LLC (“EIP”), an SEC registered investment adviser; and Bond Trust Services Corporation (“BTS”), holder of a limited banking charter issued by the State of Minnesota.

Where an activity requires registration as a municipal advisor pursuant to Section 15B of the Exchange Act of 1934 (Financial Management Planning and Debt Issuance & Management), such activity is or will be performed by EA; where an activity requires registration as an investment adviser pursuant to the Investment Advisers Act of 1940 (Investments and Treasury Management), such activity is or will be performed by EIP; and where an activity requires licensing as a bank pursuant to applicable state law (paying agent services shown under Debt Issuance & Management), such activity is or will be performed by BTS. Activities not requiring registration may be performed by any Affiliate.

This communication does not constitute an offer or solicitation for the purchase or sale of any investment (including without limitation, any municipal financial product, municipal security, or other security) or agreement with respect to any investment strategy or program. This communication is offered without charge to clients, friends, and prospective clients of the Affiliates as a source of general information about the services Ehlers provides. This communication is neither advice nor a recommendation by any Affiliate to any person with respect to any municipal financial product, municipal security, or other security, as such terms are defined pursuant to Section 15B of the Exchange Act of 1934 and rules of the MSRB. This communication does not constitute investment advice by any Affiliate that purports to meet the objectives or needs of any person pursuant to the Investment Advisers Act of 1940 or applicable state law.