Minnesota woodland property tax: Comparing 2C and SFIA
This table summarizes key elements of each law.
|20 acre minimum||20 acre minimum|
|No maximum acreage enrolled||1,920 acre maximum enrolled|
|Public access required if > 1,920 acres enrolled||No public access required|
|Exclude 3 acre minimum for building||Exclude 10 acre minimum for building|
|8 year minimum enrollment; 4 years to end agreement||1 year minimum enrollment|
|Pay usual property tax. Class rate varies from 0.50% to 1.25% depending on class and property’s value. Get $7/acre/year minimum incentive payment ($8.61 actual payment in 2008)||Pay 0.65% property tax class rate|
|Property tax qualifies for itemized deduction on federal income tax return, but SFIA payment is taxable income||Property tax qualifies for itemized deduction on federal income tax return|
Determining which law reduces your management costs the most requires some math and possibly a conversation with your county assessor about how the change in classification would affect your eligibility for credits and special assessments.
Note that your situation may be quite different, yielding a different conclusion.
Assume 80 acres of land with:
- 67 acres forest
- 12 acres open water lake
- 1 acre developed site with 400 square foot cabin
- Property taxes $14 per acre under Class 4c(1) Seasonal residential recreational, non-commercial with a 1.00% Class Rate
- No other additions or subtractions to taxes payable.
- Enroll in SFIA, pay $14 per acre property tax, but get an $8.61/acre incentive payment.
- Enroll in Class 2c with its 0.65% Class Rate and pay property taxes of $9.10 per acre.
Land eligible for SFIA includes 67 acres of forest and 3 acres of open water lake, but you must exclude 9 acres of lake and 3 acres around the cabin, leaving 68 acres qualified for SFIA and 12 acres remaining in Class 4c(1). Assume the MN DOR determined the SFIA payment to be $8.61 per acre statewide. The total property tax due on this 80 acres is: $14 tax/acre x 80 acres = $1,120. But the total SFIA incentive payment is: $8.61 payment/acre x 68 acres = $585.48. The net out-of-pocket cost for property taxes is $1,120 – $585.48 = $534.52. The property tax payment of $1,120 may be deducted as an itemized expense on federal income taxes, but the SFIA payment of $585.48 is taxable income.
Under Class 2c:
Land eligible for Class 2c includes 67 acres of forest and 3 acres of open water lake, but you must exclude 9 acres of lake and 10 acres around the cabin, leaving 61 acres eligible for Class 2c and 19 acres remaining in Class 4c(1). Total property tax due on this 80 acres is: ($9.10 tax/acre x 61 acres) + ($14/acre x 19 acres) = $555.10 + $266.00 = $821.10. The $821.10 property tax payment may be deducted as an itemized expense on federal income taxes.
Your total out-of-pocket cost for property taxes before considering income tax consequences is $534.52 under SFIA, but $821.10 under Class 2c. You appear to save $286.58 more by enrolling in SFIA than in Class 2c. Now you need to evaluate income tax consequences.
To calculate income tax effects on a property tax payment, deduct from your property tax payment a percentage of that payment according to your marginal income tax rate (10% to 35%). For example, if your property tax payment is $1,120 and your marginal income tax rate is 10%, the income tax deduction reduces that property tax cost by 10% or $112 to $1,008. Keep in mind that an income tax payment is a cost to you while an income tax deduction is a cost saving to you.
To calculate income tax effects under SFIA:
- Multiply your property tax payment by your marginal tax rate: $1,120 x .10 = $112. Deduct this $112 cost saving from your property tax payment: $1,120 – $112 = $1,008. This is your out-of-pocket cost of property taxes.
- Multiply your SFIA payment by your marginal tax rate: $585.48 x .10 = $58.55. Deduct this $58.55 cost from your SFIA payment: $585.48 – $58.55 = $526.93. This is an addition to income.
- Your SFIA payment reduces your cost of property taxes, so Subtract your after-tax SFIA payment from your after-tax property tax payment: $1,008 – $526.93 = $481.07. This is your after-tax cost under SFIA.
To calculate income tax effects under Class 2c:
Multiply your property tax payments by your marginal tax rate: $821.10 x .10 = $82.11 and deduct that amount from your property tax payment: $821.10 ╨ $82.11 = $738.99. This is your after-tax cost under Class 2c.
Compare after-tax costs:
The $738.99 after-tax cost under Class 2c exceeds the $481.07 after-tax cost under SFIA so you save $257.92 by enrolling in SFIA.
In this example, SFIA was the better choice before and after income-tax effects were calculated. You should not assume this conclusion will always be true. Where property taxes are very high, Class 2c may yield the lower out-of-pocket cost.
Other pages in this series:
Some useful links:
Perspective: Jeff Forester on problems & solutions with MN’s property tax code
MN DOR’s SFIA Fact Sheet
Sustainable Forests Incentive Act: Natural Resource Report (PDF) and SFIA FAQs (18 p. PDF)
More on 2c Managed Forest Land on our blog
MDA Conservation Funding Guide
The Minnesota woodland property tax series is authored by Mike Reichenbach and Mel Baughman.
Entry filed under: property tax. Tags: 2c, carrying costs, financial, financial aspects, introduction, managed forest lands, Minnesota, overview, property tax, property taxes, relief, SFIA, sustainable forests incentive act, tax, tax breaks, tax classification, tax relief, tax relief for Minnesota landowners, taxes, timberland, woodland.