Many short-term vacation rentals in Lake County will soon be reclassified by the county assessor's office for property tax purposes.

According to a memo from the Minnesota Department of Revenue sent May 21, county assessors have been directed to classify all short-term vacation rental properties in the county as commercial. This will cause the property owners' taxes to increase significantly, around one and a half times the residential or seasonal residential recreational tax rates.

"It’s going to be a substantial change," Lake County Assessor Gregg Swartwoudt said. "I think we’re going to absolutely notice it, small county as we are, with the tax base ... You’ve got a few constituents out there who are going to be very displeased with it, some who will be happy about it."

Swartwoudt updated the Lake County Board of Commissioners with the reclassification news during the Committee of the Whole meeting Tuesday, Nov. 19, in Two Harbors.

Short-term rentals are those made for less than 30 days at a time, typically rented through a website such as Airbnb or VRBO. The DOR's directive orders that all properties where the primary use is as short-term rentals should be classified as commercial, but Swartwoudt said the order didn't clearly define "primary use."

"The Department of Revenue went just so far in telling us if the primary use is short-term rental, it should be classified as commercial. And then they punted and didn’t give any advice on what primary use is or how to define it," Swartwoudt said. "The problem is that every assessor in our region is coming up with a different way of defining it, including us."

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Swartwoudt's department has been researching short-term rentals in the county, to generate a master database of all properties rented short-term. The department found that there are approximately 140 properties listed as short-term rentals online and a list of all the classifications the properties are currently defined under. Approximately 23 of those 140 properties are currently classified as homesteads.

"That's one area where the Department of Revenue is very specific, that if you have a homestead property, it must be available to the resident/owner at all times," Swartwoudt said. "So if you're renting the whole property, then it can't be a homestead. Nor can it be classified as seasonal residential recreational if it's being rented more than it is used by the property owner."

However, if the owner resides on the property and rents out a room in the property, then it can retain homestead classification because the primary use is residential.

Yet, the issue becomes more complex as the Department of Revenue allows incidental use of short-term rental.

"For example, when the PGA championship occurs in the Twin Cities, many people who live on the golf course rent their houses out," Swartwoudt said. "And under the directive, that's OK to do incidentally."

Therefore, Swartwoudt and his staff determined how many times a year a property could be rented short term in Lake County and be considered incidental use.

"We came up with five events," Swartwoudt said. "We included Grandma's Marathon, Beargrease, the inline marathon, Heritage Days and added one more."

So, when researching the properties in question, if the rentals have four or more reviews listed online, Swartwoudt considers that property has been rented five or more times because "not everyone leaves reviews."

Swartwoudt will be mailing letters to each of the short-term rental property owners in the county explaining the classification change and allowing the opportunity to respond.