In cabin country, rental property could get new tax treatment

Lake cabin
A large cabin dwarfs a smaller cabin on an island on Lake Vermilion. There are dozens of large and small islands on this lake in northeastern Minnesota.
Derek Montgomery for MPR News 2010

Letters to some Minnesota cabin and vacation property owners arriving this month pose questions that could carry significant tax ramifications, possibly bumping their land into a costlier commercial classification.

It comes down to this: Are the properties being used more as personal retreats or more to pull in extra income by listing them as short-term rentals?

The answers will be used to assign a primary use. And that matters because different classifications of properties carry different tax rates.

The reevaluation, triggered in part by a May memo from the Department of Revenue, has stirred up concern in lake country and already led to calls for state lawmakers to get involved.

“Minnesotans love their cabins,” said state Sen. Tom Bakk, DFL-Cook. “I think it’s likely to boil up and become a hot-button issue in the session.”

Assessors in Cook County along the Lake Superior shore and Otter Tail County in northwestern Minnesota are among those that mailed out notices in recent days.

Under penalty of law for making false statements, property owners are asked to inventory the number of days they personally stay at a property and the number of nights other people rent it for short-term getaways.

While property values affect the specific rates someone pays, seasonal recreational taxes are typically lower than commercial, sometimes considerably.

“I think this is a big, big deal. I’m very concerned,” said Mike Larson, who runs Cascade Vacation Rentals, a company that manages about 170 properties owned by other people in the North Shore region.

Larson has begun preparing his owner clients for possible sticker shock. He’s worried that some might just sell or pull out of the rental pool.

“In some instances, the taxes on these properties could triple,” Larson wrote in his letter to clients.

Larson urged his clients to take the questionnaire seriously. He also implored them to contact legislators and Gov. Tim Walz to ask for a fix.

In Larson’s home base of Cook County, no final decisions have been made.

County Assessor Robert Thompson said the letters went to owners of properties advertised as short-term rentals.

“If it’s rented more than it’s used personally, it’s going to be classified commercial,” Thompson said. “That is following the Department of Revenue’s guidance.”

In May, the state tax agency advised assessors on ways to classify properties deemed short-term rentals — those that are rented for fewer than 30 consecutive days.

The guidance was a response to queries the department has gotten amid the boom of lodging services like VRBO, Airbnb and similar outfits.

In an interview, Revenue 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 said. “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.”

Statewide, there are about 111,000 parcels valued at $10,000 or more that are classified as seasonal recreational. Bauerly figures a small fraction face classification changes, but acknowledges it’s too soon to say for sure.

In Cook County, Thompson said there are about 600 seasonal recreational properties at issue — a mix of cabins and individually owned resort units.

He said he’s not out to punish owners of vacation rentals, but he also gets the frustrations of people who keep their family cabins for personal use and from owners of hotels and resorts that directly compete with short-term rentals.

“That’s where you have an inequity,” Thompson said, “when a hotel is paying a commercial tax and a vacation rental is not paying a commercial tax but they’re operating in the same fashion and renting short-term.”

What worries Thompson is that not all assessors will read the guidance the same way and that it will lead to complaints or legal challenges in places that do make a switch.

Some counties took it as a Revenue Department order. Otter Tail County’s letter to property owners said the state agency “recently directed all county assessors to review the property tax classifications of properties offered for short-term vacation rentals.”

Otter Tail officials warned that failure to respond by year’s end would cause it to be classified as commercial.

Nick Leonard, an economic development and external relations official in Otter Tail County, said the issue is tricky for counties beyond what tax classification is ultimately applied.

“How can you have something taxed as commercial but then not have a health inspection, not have a health license and then not have the proper land use” permit, Leonard said.

In Cook County, Thompson set a mid-January deadline. If a form isn’t returned, he said the county would turn to information from vendors that track rental data to make a determination.

Minnesota Association of Assessing Officers president Daryl Moeller said in an email that his group 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.

Bakk, who represents much of the state’s tourism-dependent Arrowhead area, met last month with Walz to warn him that something was bubbling up. He said the new look of the vacation rental industry warrants a fresh look at state tax laws.

“Maybe we need another classification for seasonal recreational property depending on how much it’s being rented and how much the individual owns it is using it,” Bakk said.

In an interview, Walz said he’s getting up to speed.

“These issues were first brought to our attention by neighbors of folks who said, ‘Hey I’ve got strangers up here all the time. How are they taxing this things? How does this property work: Is it a lodge or is it a family cabin?’” Walz said. “I’m just trying to get clarity around it at this point.”

Larson, the rental manager, said the answer isn’t to make what he considers an extreme tax rate swing — from seasonal recreational to commercial. He hopes policymakers find a middle ground that keeps cabin owners or renters from being priced out.

“When you don’t have those heads in the beds those people are not spending money at our local wineries and restaurants,” he said. “And you know the rest of the story.”

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