Reclassification of short-term residential rentals (STR), commonly known as Vacation Rental By Owner (VRBOs), has stirred up concern across lake country and led to calls for state lawmakers to get involved.
Hubbard County Assessor Ginger Buitenwerf said, “We, as assessors, figured that would happen – that we’d get a special classification out of this – because we knew this was going to be a hot-button issue. You can’t change property to commercial and then not expect people to get upset.”
It all began with a 2014 Minnesota tax court case, Buitenwerf said, in which a judge determined
that a single-family lake property in McLeod County, originally classified as a “seasonal residential recreational property,” should be treated as commercial because the home was rented out roughly 90 percent of the year in 2011, 2012 and 2013.
In a May 2019 memo, the Minnesota Department of Revenue (DOR) advised county assessors to review residential properties being used for STRs and verify the property’s primary use. The guidance was a response to queries the department had received amid the popularity of lodging services like VRBO, Airbnb and craft retreat houses.
DOR defines a short-term rental property’s use as “income generation through short-term lodging (less than 30 consecutive days), which is similar to a hotel property.”
Classification depends on the property’s primary use, Buitenwerf explained. If primary use is short-term rental, then DOR said it should be classified as commercial. If the property is primarily the owner’s place of residence, then it remains residential.
In an interview with Minnesota Public Radio (MPR), DOR Commissioner Cynthia Bauerly said the memo wasn’t a directive, but was meant to provide consistency across the state. However, Bauerly stresses that local assessors are the ones who classify individual parcels for property tax purposes.
“Our broad understanding is that they are gathering the information they think they need,” she told MPR. “I think they recognize that once a property turns to income producing, that it doesn’t quite fit the seasonal recreational classification that it once did.”
Minnesota Association of Assessing Officers president Daryl Moeller said in an email to MPR that his organization has “advised all assessors to follow the Department of Revenue directive to the best of their ability.”
Moeller, of Chisago County, said the association expects state lawmakers will take up the issue next year.
In coordination with regional county assessors – Otter Tail, Douglas, Todd, Grant, Wadena, Becker, Clay, Wilkin and Traverse counties – Buitenwerf sent a survey to known STR property owners in Hubbard County.
Under penalty of law for making false statements, owners were asked to provide the number of days their property was rented out, used personally or empty.
“We’re really relying on people to answer honestly,” Buitenwerf said, so she could make determinations that are “fair and equitable to all STRs, even though people maybe don’t agree with classifying them commercially.”
If short-term rental use exceeded 50 percent or more of the days, the property was changed to commercial.
“We know that a lot of the properties aren’t used for a majority of the year because of our winters. That’s ‘unused.’ It doesn’t make it ‘use,’ and so we don’t necessarily consider that in the determination,” Buitenwerf added.
Of 129 surveyed, 59 were switched to commercial. Property owners have an opportunity to appeal the decision and provide additional information to the county assessor. She can be reached at 732-3452 or email@example.com.
Impact on property tax values
STRs are affecting neighboring property tax values, Buitenwerf said, particularly in Cook County. “Because they’re along the North Shore, they’ve seen a massive increase in value because people are buying them as income-producing properties. They are currently in the same property tax category for sales as residentials properties.”
As an example, Buitenwerf said, “Imagine Belle Taine. Let’s say we had six short-term rentals on Belle Taine and they sold in the same year and for much higher because they’re income-producing. That would affect all the values on the lake, according to the perimeters of the Department of Revenue, because they all fall in the residential/seasonal property tax classification.”
Even though STR properties are selling at higher prices than the residential market, Buitenwerf said “assessors can’t do anything about it because they all fall in the same bucket.”
“We see that as well here,” she said, but not to the same extent as Cook County.
Buitenwerf anticipates that the Minnesota Legislature will create a new classification to identify STRs and put them in a different market sales category.
“I would not want income-producing properties to affect residential property values,” she said.
Buitenwerf said STRs have been on her department’s radar for years. “We’ve been waiting for the Department of Revenue to tell us which direction to go.”
More inspections, regulations?
In addition to taxes, a commercial classification also raises the spectre of health inspections, licensing, zoning issues and changes to shoreland management ordinances.
Buitenwerf said she’s heard from resort owners frustrated that STRs aren’t required to have the same inspections, whereas resorts must meet certain guidelines.
“A lot of people support what we’re doing because they have a lot of concerns about neighboring properties being used excessively” as STRs, she said, resulting in parking, partying and noise complaints.
In August, the Hubbard County Board discussed the possibility of addressing STRs in the county’s shoreland management ordinance. County Coordinator Eric Nerness reported that two counties in northeastern Minnesota recently adopted similar ordinances.