Waldo, Arley D.

English

Research Papers in Economics

Staff Papers Series
STAFF PAPER P86-13  APRIL 1986
HOW  FARM  REAL  ESTATE  TAXES  ARE  CALCULATED  IN  MINNESOTA
Arley  D.  Waldo
Department  of Agricultural and Applied Economics
University  of Minnesota
Institute of Agriculture,  Forestry  and Home  Economics
St. Paul,  Minnesota 55108Staff Paper P86-13  April  1986
HOW FARM REAL ESTATE TAXES ARE CALCULATED IN MINNESOTA
Arley D. Waldo
Staff papers  are published without  review within the
Department  of Agricultural and Applied Economics.
The University of Minnesota  is  committed  to  the policy
that all persons shall have equal access  to  its programs,
facilities,  and employment without  regard  to race,  religion,
color, sex, national origin, handicap, age, or veteran
status.HOW FARM REAL ESTATE TAXES  ARE CALCULATED IN MINNESOTA
by
Arley D. Waldo*
Minnesota has a complex, classified property tax system.  Different
classes  of property are assessed at  different percentages  of market value,
and  state-paid property tax credits reduce the  tax liability  of some prop-
erty owners.  This  paper describes some of  the basic  features of the Minne-
sota property tax  system and illustrates how net  property taxes on farm
real  estate are calculated.  The examples  are based on provisions  in effect
for taxes  levied in 1985 and payable in 1986.
PROPERTY CLASSIFICATION AND VALUATION
The  first step  in  the property tax process  is  to  determine  the classi-
fication of all  taxable property and  to  estimate  its  market value.  This  is
the responsibility of  local property tax assessors.  Some local governments--
townships and municipalities--may choose not  to  employ their own assessors.
In  such  cases,  the county is responsible for conducting  the  assessment at  the
expense of  the local unit.  In Minnesota, assessors are appointed, rather than
elected, and must meet state certification  requirements.
Nearly all  personal property is  exempt  from  taxation.  Consequently, the
Minnesota property  tax  is  almost exclusively a tax on real  property--land
and  structures.  Property taxes provide nearly  all of the  tax revenue of  local
units  of  government.  There is  no  state property tax.
*Professor, Department of Agricultural  and Applied Economics  and Extension
Economist, Public  Policy, Minnesota Extension Service,  University of  Minnesota.2
Classification
In general,  real estate classified  as  agricultural  land includes  parcels
of  10  acres or more used for  agricultural purposes.  This may include cropland,
pastureland,  timberland, waste and  unusable land, and  land withheld from use
under  federal farm programs.  Parcels of  less  than 10  acres may also be  classi-
fied  as  agricultural  land  if  used primarily  for agricultural rather than resi-
dential purposes.  Farm real  estate includes  agricultural  land, dwellings
on agricultural  land,  and farm buildings  and other  structures.
Farm real  estate which the assessor  classifies as  agricultural  land  is
then  listed  as  either homestead or nonhomestead  property.  If  the principal
residence of  the owner is  on the  farm,  the property is  classified as  homestead
farm real estate.  The homestead classification extends  to  each shareholder
of  a "family  farm corporation" and each partner in a farm operation who is
actively engaged  in farming  and resides on the land.  Farmland need not be
contiguous to  qualify as  homestead property.  However, noncontiguous  land cannot
be  farther than  two  townships  (or  cities)  from the homestead.  All  farm real
estate  that  does not qualify as  homestead property is classified as nonhomestead
agricultural property.  For example, a farm leased to  a tenant by an  absentee
owner would  be  classified as  nonhomestead farm real estate.
Estimated Market  Value
The  property  tax assessor is  responsible  for estimating  the  current market
value of  all  taxable property.  The assessor is  to  determine,  as  closely as
possible,  the actual market value of  property using whatever appraisal methods
he or  she  deems appropriate.  Actual sales  prices are  used as one measure of
the  validity  of estimated market value.  Studies comparing assessors'  estimated
market value with actual sale prices are conducted by the Minnesota Department3
of  Revenue.  In valuing  farmland, the law also  instructs assessors  "to  consider
and give  recognition to  its  earning potential  as measured  by  its  free market
rental rate."
Property tax assessors obviously  have a difficult  job  in estimating current
market values when real  estate prices are changing rapidly.  The market  for
agricultural land  is  a leading example.  From the mid-1970's  to  1981,  the esti-
mated value of  farmland per acre  in Minnesota increased by about 250  percent.
Today,  farmland values  are probably less  than half  their 1981 levels.
ASSESSED VALUATION
The assessed valuation of property  is based  on its  classification,  estimated
market value,  and the assessment  ratios  (percentages) established by  state law.
For a given class of  property, the  assessed  (taxable) value of  each parcel is
calculated as  follows:
Estimated  Assessment  Assessed
Market Value  Ratio  Value
The  total assessed valuation of  a taxing jurisdiction  represents  its  tax base
(i.e.,  the  tax base  of a township,  city, county,  school district, or special
district).  Since taxing jurisdictions overlap, property will be subject  to
taxes  levied by several different  governmental  units.
TAX RATES
Local units  of government  "certify"  their property tax levies in dollars
to  the county auditor.  The county auditor  is  then responsible  for calculating
property  tax rates and determining the  taxes payable  for individual parcels  of4
property.  Tax rates  are calculated  as  follows:
Property Tax  Levy  Tax Rate
Tax Base
For  example, suppose a school  district levies  a property  tax of  $500,000 and
has a total  assessed valuation of  $12,500,000.  Its  tax rate would be:
$  500,000  .040  =  40  mills
$12,500,000
Note  that  property  tax rates  are usually expressed in mills.  A mill
is  1/10 of  1 percent.  A tax rate of  40 mills means  that the  tax is  $40  for
each $1,000  of assessed  (not market)  valuation.  Property tax rates are often
referred  to  as  mill rates.
An individual parcel of  property will  be subject to taxes  imposed by
several different governmental  units.  Farm real estate will  typically be
taxed by  the county, school district,  and township  in which the property is
located.  It may  also be taxed by one  or more special districts  (e.g.,  soil
and water conservation districts,  watershed districts, etc.).  For purposes
of  illustration, let's assume that  the following tax  rates  apply to  a parti-
cular farm:
Taxing Jurisdiction  Tax Rate
County  30 mills
School District  40 mills
Township  4 mills
Special Districts  1 mill
Total Tax Rate  75 mills5
GROSS  AND NET PROPERTY TAXES
Suppose that  a farm has  an estimated market value of $660,000 and  an
assessed value of  $116,240.  If  the  tax rate  is  75 mills,  the gross  tax on
the  farm will be:
Assessed  Tax  Gross
Value  Rate  Tax
$116,240  x  .075  =  $8,718
The  gross  tax on  farm real  estate will be  reduced by one or more  state-paid
property  tax  credits  to  arrive at  the net property tax payable by the owner.
The  two most  important  credits  are  the state school  agricultural credit  and
the homestead credit.  One  or more additional  credits may  apply in certain
instances.
EXAMPLE:  HOMESTEAD FARI REAL ESTATE
To  illustrate how the net property  tax on a farm homestead  is  calcu-
lated, let's consider a 640 acre  farm where the value of  the farmland,  farm
buildings, and other structures is  estimated by  the assessor to average
$1,000 per acre and the homestead dwelling  is  valued at  $20,000.  The 1985
estimated market value of  the  farm for  taxes  payable in 1986  is  then:
Assessor's Estimated
Market Value
House, Garage,  and 1 Acre
House (including garage)  $20,000
One Acre  (on which house  is  located)  1,000
Total  $21,0006
First 320 Acres  (excluding house,
garage,  and 1 acre)
Included in Homestead Base  $ 43,000
Excess over Homestead Base  $276,000
Total  $319,000
Remaining Acres Over 320
320 Acres  $320,000
Total Estimated Market Value
House, garage, and 1 acre  $ 21,000
First 320  acres  (excluding house,
garage,  and 1 acre
Included  in Homestead Base  $ 43,000
Excess over Homestead Base  $276,000
Remaining  320 Acres  $320,000
Total  $660,000
The reason for dividing the  estimated market value of the  farm into these
components  is because  two  different assessment  ratios apply  to homestead farm
real  estate and because of the way in which  the state school agricultural
credit  is  calculated.  This will become apparent as we  go along.
Assessed Value
The assessed value  of  property, as  noted earlier, is  calculated  as  a per-
centage of  the  assessor's estimated market value.  These percentages  are
referred to  as  assessment or classification ratios.  Assessment  ratios  are set
by  state law.  For  taxes payable  in 1986,  the assessment  ratios  for agricultural
homestead  real estate are:
Assessment  Ratio
First  $64,000 of market value  14%
Excess market  value over  $64,000  18%7
The lower assessment  ratio applies to what  is known as  the homestead base
value.  Under current state law, the homestead base value is  adjusted  auto-
matically each year to  reflect  statewide  changes  in property values.
In our example, assessed value is  calculated  as  follows:
House,  Garage, and 1 Acre
Estimated Market Value  $21,000
Multiplied by:  Assessment  Ratio  .14
Equals:  Assessed Value  $  2,940
First  320 Acres  (excluding house,  garage,
and 1 acre
Included in Homestead Base
Estimated Market  Value  $43,000
Multiplied by:  Assessment Ratio  .14
Equals:  Assessed Value  $ 6,020
Excess  Over Homestead Base
Estimated 'Market  Value  $276,000
Multiplied by:  Assessment Ratio  .18
Equals:  Assessed Value  $ 49,680
Total  Assessed Value
Included in Homestead Base  $  6,020
Excess over Homestead Base  49,680
Total  $ 55,700
Remaining Acres Over 320
Estimated Market Value  $320,000
Multiplied by:  Assessment  Ratio  .18
Equals:  Assessed Value  $ 57,600
Total Assessed Value
House, Garage, and 1 Acre  $  2,940
Next  319 Acres  55,700
Remaining  320 Acres  57,600
Total  $116,2408
Note  that  the lower assessment ratio  (14 percent) applies  to  the value
of  the house, garage, and one acre  plus  any additional value up  to  the home-
stead base value  of $64,000.  In  this  example,  the estimated market value
of  the house, garage, and one acre is  $21,000;  therefore an  additional  $43,000
of  estimated market  value is assessed at  the  14  percent rate  ($64,000 -
$21,000 = $43,000).  All estimated market value  in excess  of $64,000 is
assessed at  the higher rate  (18 percent).
Gross Property Tax
The gross property  tax on  the farm is its  total assessed value multiplied
by  the property  tax rate.  Let's  assume  in this  example  that  the local property
tax rate  is  75 mills  (i.e.,  the  tax is  7.5  percent of  the farm's  assessed
value).  The gross  tax before the subtraction  of property tax credits  is:
House, Garage, and 1 Acre
Assessed Value  $  2,940
Multiplied by:  Tax Rate  .075
Equals:  Gross Tax  $ 220.50
First 320 Acres  (excluding house,
garage, and 1 acre)
Assessed Value  $  55,700
Multiplied by:  Tax Rate  .075
Equals:  Gross Tax  $4,177.50
Remaining Acres Over 320
Assessed Value  $  57,600
Multiplied by:  Tax Rate  .075
Equals:  Gross Tax  $4,320.00
Total Gross Tax
House, Garage, and 1 Acre  $  220.50
Next  319 Acres  4,177.50
Remaining 320 Acres  4,320.00
Total  $8,718.009
State  School Agricultural Credit
All  farm real estate, both homestead  and nonhomestead, is  eligible to
receive  a state-paid  school agricultural credit.  This credit  reduces the
property tax  liability of  the  owners of  farmland.  The credit  is  calculated
as  a percentage of  the gross tax.  The amount  of  this  credit  is  paid directly
to  local  school districts by the state.  For  taxes payable in  1986,  the
state school agricultural credit for homestead  farm real estate is:
Percent of
Applies to
Tax_~~  on:  ~~~Gross  Tax Tax on:
First 320 Acres  (excluding  36%
house, garage,  and 1 acre)
Excess Over 320 Acres  26%
The school  agricultural  credit  in  this  example is  calculated  as  follows:
First 320 Acres  (excluding house,
garage, and 1 acre)
Gross Tax  $4,177.50
Multiplied by:  Percent Credit  .36
Equals:  School Agricultural Credit  $1,503.90
Remaining Acres Over 320
Gross Tax  $4,320.00
Multiplied by:  Percent  Credit  .26
Equals:  School Agricultural Credit  $1,123.20
Total School Agricultural Credit
House, Garage, and  1 Acre  $  0
Next  319 Acres  1,503.90
Remaining  320 Acres  1,123.20
Total  $2,627.1010
Note  that  the school agricultural credit does not  apply to  the  tax on the
house,  garage, and one acre.
Property Tax after School Agricultural Credit
Gross  Property Tax on Farm  $8,718.00
Minus:  School Agricultural Credit  2,627.10
Equals:  Tax after Credit  $6,090.90
Homestead  Credit
Homestead farm real estate receives the  same state-paid homestead credit
as nonagricultural  homesteads.  This credit is calculated as  a percentage of
the property tax  liability remaining after subtraction  of  the state school
agricultural  credit.  For  taxes payable  in 1986,  the homestead credit  is 54
percent of  the tax  up  to  a maximum credit  of  $700.  In this example,  the home-
stead credit  is:
Tax after School Agricultural Credit  $6,090.90
Multiplied by:  Percent Credit  .54
Equals  $3,289.09
Since  this amount  exceeds $700,  the farm in this example would receive  the
maximum credit  of  $700.
Net Property  Tax
The net property tax payable on the  farm in this example  is:
Gross Property Tax  $8,718.00
Minus:  School Agricultural Credit  2,627.10
Minus:  Homestead  Credit  700.00
Equals:  Net Property Tax  $5,390.9011
The  "effective"  tax rate--net  tax as  a percentage of  estimated market
value--in this example  is:
Net Property Tax  Effective
Estimated Market Value  Tax Rate
$  5,390 90  .0082  =  0.82%
$660,000.00
This example does not  take  into account  any additional property tax
credits which may  apply  to certain parcels  of real estate.  Other credits
include the wetlands credit, native prairie credit, disaster  credit, agri-
cultural preserves credit,  etc.  Special  tax provisions apply  to  the home-
steads of blind and disabled persons.
EXAMPLE:  NONHOMESTEAD FARM REAL ESTATE
To  show how the net property  tax on nonhomestead farm real estate  is
calculated, let's use  the same  farm as an example.  Now, however, we will
assume that  the owner does not  live on  the farm and  that  the farm is  rented
to  a tenant.  Therefore, the  farm does not qualify as homestead property.
As before, we will consider a 640  acre farm where the value of  the
farmland and  farm buildings and structures is  estimated by  the assessor to
average  $1,000 per acre and  the farm dwelling is  valued at  $20,000.  The
1985  estimated market value of  the  farm for  taxes payable  in  1986  is  then:
Assessor's  Estimated
Market Value
House,  Garage,  and 1 Acre
House  (including garage)  $20,000
One Acre  (on which house  is  1,000
located)
Total  $21,00012
Remaining Acres
639 Acres  $639,000
Total Estimated Market  Value
House, Garage,  and 1 Acre  $ 21,000
Remaining 639 Acres  639,000
Total  $660,000
The total estimated market value  is  the same  as  in the example  for a
farm homestead.  The tax calculation  is  simpler  in this case because non-
homestead farm real estate receives  the same percentage state school
agricultural  credit regardless  of  the  number of acres  and because there is
no homestead  credit.
Assessed Value
For  taxes payable in 1986,  the assessment  ratio for nonhomestead farm
real estate  is  18  percent.  In this example,  assessed value  is  calculated as
follows:
House, Garage, and 1 Acre
Estimated Market Value  $ 21,000
Multiplied by:  Assessment  Ratio  .18
Equals:  Assessed Value  $  3,780
Remaining  639 Acres
Estimated Market Value  $639,000
Multiplied by:  Assessment Ratio  .18
Equals:  Assessed Value  $115,020
Total Assessed Value
House, Garage, and 1 Acre  $  3,780
Remaining 639 Acres  115,020
Total  $118,80013
Although  the assessment  ratio  for nonhomestead farm real estate  is  the
same regardless of  farm size,  this example  separates out  the assessed value
of  the farm dwelling, garage, and  one  acre because  the state school agricultural
credit  does not apply  to the  tax on this portion of  total estimated market value.
Gross Property Tax
As before,  the gross property tax on the farm is  its  total  assessed value
multiplied by the local property tax  rate.  Again, we will assume the property
tax rate is  75 mills.  The gross property  tax before the subtraction of
property tax credits  is:
House, Garage, and 1 Acre
Assessed Value  $  3,780
Multiplied by:  Tax Rate  .075
Equals:  Gross Tax  $  283.50
Remaining  639 Acres
Assessed Value  $ 115,020
Multiplied by:  Tax Rate  .075
Equals:  Gross Tax  $8,626.50
Total Gross Tax
House, Garage, and  1 Acre  $  283.50
Remaining 639  Acres  8,626.50
Total  $8,910.00
State School Agricultural  Credit
Nonhomestead farm real estate is  eligible to  receive  the state
school agricultural  credit.  For  taxes payable in 1986  the credit  is  26
percent  of  the gross property  tax, excluding  the tax on the house,  garage,
and  one acre.  The percentage credit  is the  same regardless  of  the size  of14
the  farm.  Recall  that the  credit  for  the first  320 acres of  homestead farm
real estate  (excluding the house, garage, and one acre) was 36  percent.
The school  agricultural  credit  in  this example is:
640 Acres  (excluding house,
garage and 1 acre)
Gross Tax  $8,626.50
Multiplied by:  Percent Credit  .26
Equals:  School Agricultural  Credit  $2,242.89
Net Property Tax
The net property tax payable on the farm  in  this  example is:
Gross Property Tax  $8,910.00
Minus:  School Agricultural Credit  2,242.89
Equals:  Net Property Tax  $6,667.11
The effective tax rate is:
$  6,667.11  _ $660,0007.0011  .0101  =  1.01% $660,000.00
Again, this example does not  take into account any other property tax credits
which may  apply to specific parcels of  property.
Note  that  the effective tax  rate on nonhomestead  farm real  estate is
higher  than  the  tax rate on homestead  farm real estate--in these  examples,
1.01 percent  for nonhomestead property as  compared with 0.82  percent for home-
stead property.  The difference is due  to  the homestead credit,  the higher
school  agricultural  credit  that  applies to  homestead farm real  estate, and
the difference  in assessment  ratios.15
CONCLUDING NOTE
In Minnesota, local units of  government  levy property taxes--often
subject  to  levy limitations  imposed by  state  law.  Local property tax levies
relative to  the property tax base determine the property tax  rate.  All
property within a given taxing jurisdiction is subject  to  the same local
tax rate.  However,  the effective  tax rate on different  classes of property
will vary because of  differences  in assessment  ratios  and in state provisions
for property tax credits.  And  the  composition of  the local  tax base will
also  affect  the distribution of  property tax burdens among  different classes
of  property.
The purpose of  this paper was  to  illustrate how property taxes  on farm
real estate are  calculated.  These examples are based on provisions  in effect
for taxes  payable in  1986.  Keep  in mind that  property tax provisions are  fre-
quently changed by the legislature.

HOW FARM REAL ESTATE TAXES ARE CALCULATED IN MINNESOTA

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