The United States Supreme Court recently heard a case involving a grandmother and property taxes in Hennepin County, Minnesota. While the court has not issued its opinion yet – it is expected this summer – the court has heard oral arguments. The petition to the US Supreme court to take up the case – called a Petition For A Writ Of Certiorari – tells a harrowing story of home ownership, aging and taxes. But what is the real story about property taxes in Minnesota?
What Are Property Taxes?
Lots of people know and complain about income taxes and estate taxes, but another classic component of any taxing regime is property tax. A critical component for both residential and commercial real estate owners is “What are the property taxes?”
Many new real estate investors, whether it be a first home buyer or a commercial property for a business, fail to consider the impact of property taxes on the overall long-term cost of owning property.
In Minnesota, a property owner’s property tax bill is composed of local and state property taxes. Local property taxes help fund local programs and services, such as public schools, fire and police protection, streets, libraries, and more. State property taxes fund school districts, towns, cities, counties, and other special taxing districts.
Some properties in Minnesota such as seasonal cabins and commercial or industrial property are also subject to a state property tax. This Minnesota state general tax goes into the state general fund. To learn more, Minnesota’s department of revenue provides good resources here.
Why Are Property Taxes So High in Some Places but Not in Other Places?
Every state in the United States, as well as the District of Columbia, imposes property taxes on real property. Where states differ, and what causes property taxes to be “higher” in some states than in other states, depends on the home values, tax rate, other sources of tax revenue a state collects (sales tax, etc.), and what level of services and expenses at the local level are paid for with the property taxes.
For example, the state of Hawaii has the lowest effective property tax rate in the country (.29%) but it also has one of the highest median home values in the country ($662,100), which makes the actual property tax imposed appear high, with the median real property tax of $1,893.
Alabama, in contrast, has the second lowest property tax rate (.41%) but it also has one of the lowest median home values in the country ($157,100), which makes the median property tax imposed and paid much lower than Hawaii ($646).
Both Hawaii and Alabama charge the same sales tax rate (4%), but Hawaii has a lot more tax income than Alabama because of its massive tourist industry.
Property Tax in Hennepin County, Minnesota
According to tax-rates.org, Hennepin County’s median property tax is $2,831 per year for a home worth a median value of $247,900. This amounts to 1.14% of a property’s assessed fair market value and makes Hennepin County one of the highest median property tax rates in the United States.
Unlike sales or income tax, there is not a simple tax rate to consider in Hennepin County since the Hennepin County uses a complicated formula set by the local tax assessor’s office on a property-by-property basis. If you need to find out the exact amount on your property tax bill, then you will need to contact the Hennepin County Tax Assessor’s office.
Next door, in Ramsey County, Minnesota, property taxes are slightly lower with the median property tax at $2,345 per year for a home worth a median value of $222,700. This amounts to 1.05% of a property’s assessed fair market value. Ramsey County also uses a complicated formula set by the local tax assessor’s office on a property-by-property basis, so finding out the exact amount of property taxes requires contacting the Ramsey County Tax Assessor’s office.
What Happens If Property Taxes Aren’t Paid?
Failure to pay property taxes can cause you to lose your property and any equity you have in the property. Equity for real property purposes means the value of the property in excess of debt owed on the property, with the value being created by a combination of the appreciation of the value of the property over time and the repayment of any debt owed to the bank.
So, what happens in Minnesota if you fail to pay your property taxes? In Minnesota, property taxes are determined and regulated at both the county and the state level.
Property taxes are due in May and October. If an owners fail to pay taxes by either the May or October deadlines, the taxes will be considered “late.” But if the property owner misses an entire year’s worth of taxes, then the taxes will be considered “delinquent.” If a property owner fails to pay property taxes, then there is the possibility that the County will seize or take the property.
Many residential property owners pay their real property taxes to their mortgage holder as part of the payment of the mortgage. The mortgage holder or servicer “escrows” the property taxes paid in monthly installments by the homeowner and then pays them over to the tax authority on behalf of the homeowner.
However, the mortgage holders or servicers don’t do this out of the goodness of their hearts. The banks do this because the property is the “collateral” for the loan that was made to purchase or improve the property, and failure to pay the taxes could result in the property being taken.
Property Tax Relief Options and Redemption Periods in Minnesota
The State of Minnesota provides a few options for property owners who cannot pay their property taxes to avoid losing their property for failure to pay taxes. The State of Minnesota gives a grace period of up to five years before forfeiture where the property owners can refinance their home to pay back taxes, enter into a tax payment plan, or sell the home and use the proceeds from the sale to pay back taxes.
The key difference is that “late” taxes will be assessed an additional late fee on the following deadline where the “delinquent” taxes will start the forfeiture process. If an owner is in forfeiture, the owner (and any other interested parties like creditors or lienholders) will receive a Notice of Delinquent Taxes and a Delinquent Tax Letter from the State which explains the forfeiture process, timeline, amount due plus interest, and payment instructions.
If the owner doesn’t object to the tax calculations, then a court will issue a Tax Judgment and the Redemption Period begins. The state then holds a lien for unpaid taxes against the property and a future interest in the State is created. Ultimately, who ends up with the property depends on what happens during this Redemption Period.
The Redemption Period lasts three years where the owner or another interested party can “redeem,” or pay back delinquent taxes plus fees and interest, to cancel the tax lien against the property. If the owner is 65 or older, the owner may qualify for the Senior Property Tax Deferral Program. This program could help the owner cure the delinquency and afford their property taxes going forward. There are also similar programs for veterans and people with disabilities.
What To Do If You Can’t Pay Your Minnesota Property Taxes
Ultimately, if a property owner finds themselves in a challenging financial situation as a homeowner or commercial property owner, then it is really important to pay careful attention to all communications from the County and State regarding the property’s tax status. Also, it’s a best practice to communicate directly with the State and County to try and set up a repayment plan to avoid forfeiture.
Avisen Legal Law Clerk Beau Raymond-Iaquinto dug in and learned all about Minnesota property taxes to produce this article. No law clerks or law students were harmed in the production of this article despite the dry nature of the content.