Limited Market Value Revisited
September 2007
Over the past 25 years, state policy-makers have been concerned with escalating market values and their effect on property tax bills. They have heard from many taxpayers, namely homeowners, farmers, seasonal recreational property owners, as well as business people about their valuation increases and subsequent payable taxes.
In an effort to address this matter, the concept of limited market value (LMV) was created and has been repealed, reintroduced, and amended several times. It is a statutory limit designed to lessen the impact of tax increases that may be attributable to rising valuations. Under the law, there is a cap established as to how much the property’s taxable market value is permitted to increase from one year to the next.
This limitation was scheduled to expire for 2008 taxes payable. In 2005, legislative changes were made to delay the phase-out by two years. As a result, all properties will have their taxes based entirely on the assessor’s estimated market value beginning with the 2010 payable year.
What properties are valued and taxed at their market value and which property types are subject to the current application of limited market value?
The assessor is required by law to value all property at its market value. This value is often called the assessor’s estimated market value. If applicable, a limited market value is computed and used for the purpose of determining the property tax bills for properties classified as agricultural and residential homestead or non-homestead, non-commercial seasonal recreational, and timberland. This value is also known as the taxable market value (i.e. the value after all limitations, restrictions, exclusions, and deferral have been deducted). All other classes of property, specifically commercial, industrial, apartments, and public utilities, are not eligible for the limited market value treatment and are taxed according to the assessor’s estimated market value. Furthermore, this limit does not apply to new construction that was made to qualifying properties in the year in which it became taxable and to properties that change from a qualifying class to a non-qualifying class.
How does limited market value work?
Limited market value has no effect on the assessor’s estimated market value. It is automatically calculated by using the assessor’s estimated market value as a point of reference and making use of a well-defined formula prescribed by law. Owners of qualifying property do not have to file an application or submit a request for limited market value. Each payable year, the maximum value subject to taxation is established by computer programming that applies a specific percentage to the previous year’s taxable market value, another distinct factor to the difference between the previous year’s taxable market value and the current year’s estimated market value, and chooses the greater of the two reported values.
The following summary illustrates the annual percentage and phase-out applied in the limited market value formula:
| Payable Tax Year | % of Previous Year's Taxable Market Value | % of the Difference between
Previous Year's Taxable Market Value and
Current Year's Estimated Market Value -- Difference Factor |
| 2007 | 15% | 25% |
| 2008 | 15% | 33% |
| 2009 | 15% | 50% |
| 2010 | | Limited Market Value expires, tax based on Estimated Market Value |
The examples below show how limited market value was applied to a qualifying property for the 2007 payable tax year. This property had a 2006 estimated market value of $150,000. The taxable market value of $150,000 was the same as the estimated market value because it did not have limited market value:
Scenario #1: If the market value of the property increased by 10 percent to $165,000, the limitation would not be imposed because it had no effect. The value subject to taxation was increased by 10 percent to $165,000.
Scenario #2: If the market value of the property increased by 20 percent to $180,000, the value subject to taxation was increased by 15 percent to $172,500 because the percentage of the previous year’s taxable market value was applied.
Scenario #3: If the market value of the property increased by 70 percent to $255,000, the value subject to taxation was increased by 17.5 percent to $176,500 because at least 25 percent of the $105,000 difference between the previous year’s taxable market value and the current year’s estimated market value was applied since it was greater than the 15 percent increase over the previous year’s taxable market value.
How has limited market value impacted taxes payable on a statewide basis, in Greater Minnesota, and locally?
According to the Minnesota Department of Revenue’s Limited Market Value Report for Taxes Payable in 2007, the limited market value law excluded over $33.0 billion in property valuation or about 7.2 percent of the total pre-limit market value for all qualifying properties. The total market value limitation for the current payable year was less than the percentage excluded in the five previous years, but was higher than the annual percentage excluded between 1994 through 2001. Residential properties had the largest share of this exclusion at 46.5 percent, followed closely by agricultural/timberland properties at 42.2 percent, and seasonal recreational residential properties at 11.3 percent. In terms of the total value reduction not subject to taxation, seasonal recreational properties were reduced the most, by 21.9 percent, down slightly from last year; agricultural/timberland properties were reduced by 18.0 percent, up from a year ago and at a record high; and residential properties were decreased 13.3 percent, following a similar downward trend that started in 2003. Albeit, the changes in the share of taxable market value for each property type were relatively small, causing net taxes to increase slightly for non-limited properties and residential homestead properties relative to the tax that would have been paid without the limitation while tax bills for all other qualifying properties subject to the limitation decreased.
In Greater Minnesota, it was reported that the limited market value law excluded about 22.6 billion in 2007, an increase of 4.2 billion over the previous year. This exclusion totaled 10.7 percent of the pre-limit market values. By property type, agricultural/timberland properties had $12.0 billion in excluded value, reducing the total market value not subject to taxation by 16.9%; the excluded value and percent reduction for seasonal recreational residential properties was $5.4 billion and 21.9 percent; and residential properties had $5.2 billion in excluded value and a reduction of 16.3 percent in market value. The most significant value reductions have occurred in both the lake and rural areas (i.e. primarily in the townships and small rural communities).
As for Stearns County, the extent of the value reductions attributable to limited market value varied greatly by property type among the townships and cities. It appears that agricultural properties had the highest percent reduction followed by seasonal recreational residential properties and residential properties. In short, it can be said that the local effect of limited market mirrors the picture that was painted for Greater Minnesota.
What effect will the phase-out of limited market value have on tax bills?
There will be a wide range of impacts on the tax bills of property owners even if levies remain unchanged. Some properties will be winners and other properties will be losers as the phase-out of limited market value comes to fruition. It will vary by location and property type based upon the distribution of market values caused by the limited market value law. Properties that are currently valued and taxed at their estimated market value may see their tax bills decrease, level off, or slightly increase while properties that have had a value limitation may see their tax bills increase because their exclusion will expire and their share of taxable market value will grow, resulting in a tax shift (i.e. increases in the taxable market value have the effect of decreasing property tax rates and shifting taxes from properties with little or no value growth to those properties experiencing moderate to significant increases in valuation). This change in taxation will occur within each of the limited classes of properties as well as onto and off of other classes of limited and non-limited properties (i.e. adjustments made to the taxable market value will redistribute the net payable tax among and between property tax classes). Additionally, market value credits (i.e. homestead and agricultural credits) that have been extended to some properties receiving limited market value will change causing their property taxes to increase as a result of a loss in state paid credits that are determined by other formulas.
Can a property owner appeal a change in limited market value?
Unlike the assessor’s estimated market value, green acre value, and property tax classification, limited market value and any change resulting from its phase-out cannot be appealed by a property owner during the appeals process, nor can the local and county boards of appeal and equalization as well as the tax court make changes to it. Limited market value is the law, and the method of calculation is applied uniformly throughout the state without exception.
Is there any help available to property owners who are adversely impacted by the phase-out of limited market value?
Only qualifying agricultural and residential owners who homestead their properties can seek property tax relief through the Minnesota Property Tax Refund Program. There are two property tax refunds linked with this program---the regular property tax refund that considers income of the household in its equation and the special property tax refund that ties both the percent increase and dollar amount change in the tax bill to its computation. The Department of Revenue administers this program, and if certain requirements are met by the applicant, one or both of these refunds can be authorized.