UNDERSTANDING YOUR ASSESSMENT
Homestead Market Value Exclusion
In July 2011, the Minnesota Legislature changed the manner in which homestead benefits are extended to qualifying class 1a residential homestead, 1b blind/disabled homestead, and 2a agricultural homestead (house, garage, and first acre) properties. It repealed the Homestead Market Value Credit, known by most homeowners as the homestead credit (i.e. a state paid reduction in the amount of taxes due), and replaced it with a Homestead Market Value Exclusion (i.e. a reduction in the amount of value subject to taxation). This exclusion provides for a portion of each homestead property’s market value that is valued at $413,800 or less to be excluded from its value for tax calculation purposes. The amount of value excluded is directly proportional to the amount of homestead credit that the property had received, but this change in taxable market value does not mean that the subsequent tax will be the same. As a result, the tax burden on homestead property may either be lesser or greater in payable year 2012 depending upon the mix of properties and the overall tax rate within each taxing district, while it will be greater for other property types.
How do the homestead benefits change for qualifying properties, and will this change result in a tax increase?
Under the old law, the Homestead Market Value Credit equaled the homestead benefit, and its calculation was based entirely upon the value of the homestead property. Since the credit was subtracted from the gross tax amount to arrive at a net payable tax, it affected each homeowner independently. Under the new law, the Homestead Market Value Exclusion is still calculated on the homestead property, but the tax benefit will depend on a variety of factors other than the property’s value. This benefit will vary based on tax base characteristics of each taxing district and on levy decisions reached by local government officials.
First, the change from a credit to a market value exclusion will result in each homestead property contributing a smaller amount to the tax base for all taxing districts. The reduced tax base will affect tax rates and the taxes on all properties because the exclusion is a reduction in value subject to taxation. In other words, if the same number of dollars is levied by each taxing authority next year, the tax rate which acts as a multiplier will increase to compensate for the loss in tax base value resulting in some properties paying proportionately more taxes than a year ago.
Second, the market value exclusion received by homestead property will shift the relative burden of who pays the tax. Certain properties that do not receive homestead benefits such as commercial, industrial, apartments, farms, cabins, high valued homes, and non-homestead residential properties will experience higher property taxes. According to results published in a Minnesota House Research Simulation Report, property tax changes will vary on a statewide average basis by property type from +2.5% on commercial-industrial property to +6.6% on agricultural property. Increases on other property types are +3.2% for residential homesteads, +4.6% on residential non-homesteads, +4.6% on apartments, +3.3% on public utility property, and +3.8% on cabins. These estimates are only an approximation and are most accurate on a statewide level because the degree of change will vary significantly by property type as the jurisdiction under review gets smaller (i.e. a township or city compared to the county or state level).
Last of all, the change in homestead benefits has eliminated the state paid credit reimbursements to local governments meaning that the entire levy will now be paid by all taxpayers. How this change affects taxes will depend upon each taxing authority’s response to this revenue loss in regards to their budget conditions and service preferences.
Does the Homestead Market Value Exclusion provide more or less benefit to homeowners in low tax rate areas than the homestead credit?
When the tax rate is close to or at the state average of 100, the homeowner receives about the same benefit because the calculation of both the exclusion and credit are fairly comparable. In lower tax rate areas, the excluded value provides homeowners with less benefit. In high tax rate areas, it may offer a greater benefit.
How does the calculation of the Homestead Market Value Exclusion compare to the Homestead Market Value Credit?
Even though the benefits of the exclusion and former credit are not equal, the calculations are similar. Both benefits reach their maximum at $76,000 of market value/taxable market value (i.e. $30,400 for the exclusion and $304 for the credit), and each benefit is reduced to $0 when the market value/taxable market value is $413,800 or greater. For a homestead property valued at $76,000 or less, the exclusion is 40.00% of market value, yielding $30,400 at $76,000 of market value whereas the credit was 0.40% of the first $76,000 of taxable market value or say, $304 at $76,000. For a homestead property valued between $76,000 and $413,800, the exclusion is $30,400 minus 9.00% of the valuation over $76,000 while the credit was $304 minus 0.09% of the taxable market value. For a homestead property valued at $413,800 or more, there is no exclusion or a credit.
The following example is a comparison of the exclusion and credit calculations for a $125,000 homestead property:
Exclusion = (40.00% x $76,000) - ($49,000 x 9.00%)
= $30,400 - $4,410
= $25,990
($125,000 EMV - $25,990 Exclusion = $99,010 TMV)
Credit = (0.40% x $76,000) - ($49,000 x 0.09%)
= $304 - $44.10
= $259.90
(Gross Tax Amount - $259.90 Credit = Net Payable Tax)
Is the Agricultural Homestead Market Value Credit affected by the change in homestead benefits?
No, the Agricultural Homestead Market Value Credit was not changed and will continue to be a state paid credit that reduces the amount of taxes due. It is calculated and administered in the same way as it was in previous payable years.
Is the Referendum Market Value affected by the change in homestead benefits?
No, the taxable market value or market value used to determine the Referendum Market Value is the value prior to the Homestead Market Value Exclusion.
Can a person who is receiving the disabled veteran exclusion obtain the homestead market value exclusion benefit?
No, an individual qualifying for the disabled veteran exclusion is not eligible to receive the Homestead Market Value Exclusion benefit.
Can a person who is receiving the homestead market value exclusion benefit apply for a property tax refund?
Yes, any homestead property owner may apply for a property tax refund. An owner who meets certain program requirements and files a timely application may be eligible for a regular refund and/or a special property tax refund.