Serving Minnesota and Northern Iowa.

Market value exclusion will impact property taxes

By Janet Kubat Willette

Date Modified: 11/17/2011 9:18 AM

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Property tax statements in the mail later this month may cause sticker shock.

The budget agreement reached between Gov. Mark Dayton and legislative leaders this summer eliminated the Homestead Market Value Credit and began the Homestead Market Value Exclusion.

The credit worked like this: The state told the county or other property taxing jurisdiction that it would pay a portion of a property owner's tax bill. That amount showed up as a credit on a property owner's tax statement. The county or other taxing jurisdiction included the credit from the state in their budget.

Unfortunately, the state didn't always come through with the promised money.

"The state of Minnesota was the largest delinquent taxpayer and I said that was wrong," said Rep. Greg Davids, R-Preston, chairman of the House Tax Committee. "The whole thing is if you're going to have it … I have no problem with the market value homestead credit as long as you fund it, but we weren't funding it so it's a pretty dishonest, disingenuous program."

The homestead credit was fully funded once in the past 10 years, he said.

"We had a lot of county, city officials … I had a lot of them come to me and say if you're not going to fully fund the program than get rid of it."

"Looking at accountability, transparency and just honesty, the Legislature, working with the governor's office, decided to eliminate the program and replace it with an exclusion," Davids said.

The exclusion works like this: It excludes some of the value of a homestead when taxes are calculated. This applies both to residential homesteads in cities and in townships. The total amount of taxes needed to be collected in a jurisdiction is spread among local property taxpayers. The state saves money because it doesn't pay the credit.

The Homestead Market Value Exclusion applies to residential homesteads valued up to $413,800. The Ag Homestead Market Value Credit is not impacted by the change from a homestead credit to an exclusion, said Matt Massman, deputy commissioner for the Minnesota Department of Revenue.

The market value exclusion excludes 40 percent of market value for up to the first $76,000 or a home's value, a maximum of $30,400, according to information provided by Davids and confirmed by Massman. The home's market value is $45,600 after the inclusion is applied, so the homeowner pays taxes on the adjusted value of $45,600, not on the home's market value of $76,000.

The exclusion drops by $900 for every $10,000 in value greater than $76,000, phasing out at $413,800. For example, a home valued at $200,000 would have an adjusted market value of $180,760 after an exclusion of $19,240 is applied.

The changes take effect for taxes payable in 2012, Massman said.