Homestead classification is a complex issue
Homestead classification is only one of many issues that need to be addressed when developing and implementing a farm business transition and personal estate plan. One small omission or incorrect selection can be costly.
For clarification on homestead classification, visit with your county assessor for information specific to your situation. Seek qualified professional legal help during farm transition and estate planning implementation.
Homestead classification and estate tax
During the 2011 Minnesota legislative session, state lawmakers initiated a qualified small business property and qualified farm property exclusion relating to the Minnesota estate tax. The estate tax exclusion for qualified small business and qualified farm property affects those dying after June 30, 2011.
The exclusion is per qualifying individual and is in addition to the Minnesota personal estate tax exclusion available to every individual in the state. The law tied qualifying for the farm property exclusion to maintaining homestead classification on farmland until death.
Keep homestead classification to reduce estate taxes
For farmland, maintaining homestead classification reduces yearly property taxes on farmland, and upon death, maintaining homestead classification may reduce or eliminate Minnesota estate taxes.
If homestead classification is lost before the deceased person's death, the estate will not qualify for the additional exclusion.
Many folks feel qualifying is not going to be a problem and the exclusion is a solution for eliminating Minnesota estate tax upon their death. However, without planning and maintaining homestead classification, there could be major issues.
The scenarios below will help you determine your situation and whether the exclusion applies.
| Scenario | Homestead qualified | Exclusion qualified |
|---|---|---|
| Landowner lives on the land. Landowner farms the land. | Yes (regular ag)1 | Yes |
| Landowner lives on the land. Landowner cash rents land to an unrelated tenant, crop-shares or custom farms the land. | Yes (regular ag)1 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner is actively engaged in farming the land. | Yes (active farming)2 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner's qualifying relative4 lives on the land, and the qualifying relative farms the land. | Yes (ag relative)3 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner's qualifying relative4 does not live on the land, but the qualifying relative farms the land. | Yes (active farming)2 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner's qualifying relative4 lives on the land, but the qualifying relative does not farm the land. The land is cash rented to an unrelated non-family tenant. | Yes (ag-relative)3 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner's qualifying relative4 does not live on the land nor farms the land. Landowner cash rents the land to an unrelated non-family tenant. | No | No |
| Landowner lives within four cities, townships or a combination thereof from the land. Landowner's qualifying relative4 does not live on the land nor farms the land. Landowner crop-shares or custom farms the land. | Maybe (only if landowner meets definition of active farming)2 | Maybe |
| Land is in an authorized entity5. Landowner is a member of the entity and lives on the land. Landowner is actively engaged in farming the land on behalf of the entity. Claims no other homestead. | Yes (active farming)2 | Yes |
| Land is in an authorized entity5. Landowner is a member of the entity and lives within four cities, townships or a combination thereof from the land. Landowner is actively engaged in farming the land on behalf of the entity. Claims no other homestead. | Yes (active farming)2 | Yes |
| Land is in an authorized entity5. Landowner is member of the entity but does not farm. Landowner a) lives on the land or b) lives within four cities, townships or a combination thereof from the land. Landowner cash rents the farmland to a qualifying relative4 who is not a member of the entity. | No | No |
| Landowner lives on the farm and the farmland qualified for homestead classification. Landowner has to enter a nursing home, boarding care facility, or an elderly assisted living facility. | Yes (regular ag)1 | Yes |
| Landowner lives on the land and farms the land. Landowner goes south each winter but Minnesota is their state of residence6. | Yes (regular ag)1 | Yes |
| Landowner lives within four cities, townships or a combination thereof from the land and a qualifying relative4 farms the land. Landowner goes south each winter but Minnesota is their state of residence6. | Yes (ag relative)4 | Yes |
| Landowner lives somewhere not within four cities, townships or a combination thereof from the land. | No | No |
1Regular Agricultural Homestead is a single, one-time application requirement until law changes. See MS.273.124, subd. 1(a).
2Active Farming Homestead, also referred to as Special Agricultural Homestead, is an annual application requirement. See MS.273.124, subd. 14(b), clause (i). The Minnesota Department of Revenue defines a person actively engaged in farming as “participat[ing] in the day-to-day labor, decision making, and management of the homestead. They also must assume all or part of the financial risks of the farm.”
3Agricultural Relative Homestead is a single, one-time application requirement until law changes. See MS.273.124, subd. 1(d).
4Qualifying relative includes landowner's spouse, landowner's or landowner's spouse's son, daughter, grandson, granddaughter, siblings and parents. Additional qualifications apply depending on situation.
5An "Authorized Entity" includes such things as a family farm corporation, joint family farm venture, family farm limited liability company, or a partnership that is operating a family farm. For information specific to your situation, see your county assessor.
6When entering a health care facility or traveling out of state for the winter, you can retain homestead classification. This is referred to under state law as a “temporary absence.” If traveling out of state, Minnesota has to be your state of residence to maintain the homestead classification in Minnesota.
Land in trust
Placing land in trust is a common estate planning strategy. However, if not done properly this approach can cause challenges to maintaining homestead classification.
The type of trust is not the current concern regarding homestead classification. Property can be placed in a testamentary, inter vivos, revocable or irrevocable trust but regardless of type, the trust does not receive the homestead classification. For additional information regarding homestead classification as it pertains to trust property, please see “Using trusts: Legal issues and options.”
Land held in a trust can be eligible for homestead classification through a trust grantor, grantor’s surviving spouse or qualifying relative occupying the property. The individual also needs to be a Minnesota resident to qualify. In addition, these same rules apply to life estates and transfer upon death deeds.
- Land held in a trust is eligible for homestead classification if the grantor uses the property as a homestead.
- If the grantor passes away and the trust is not dissolved, the grantor’s surviving spouse can occupy the property and it will continue to receive homestead classification.
- If the trust is dissolved, homestead classification will be based upon ownership and occupancy facts after the trust is dissolved.
Property held in trust is eligible for homestead classification if a qualifying relative of the grantor of the trust occupies it. The qualifying relative of the grantor must occupy and use the property as a homestead to qualify for homestead classification.
For agricultural property held in trust, a qualifying relative includes a child, grandchild, sibling or parent of the grantor of the trust or spouse of the grantor. Any of these individuals must be a Minnesota resident to qualify for the homestead classification. The qualifying relative or their spouse may not claim another agricultural homestead in Minnesota.
Family farm corporation use of trust-held homesteads
Property held in trust is eligible for homestead classification if it is rented by
- a family farm corporation,
- joint farm venture,
- limited liability company,
- or partnership operating a family farm (an “Authorized Entity”).
The trust’s grantor or the grantor’s surviving spouse must be a shareholder, member or partner and either:
- a shareholder, member, or partner of the authorized entity occupies and uses the property as a homestead; OR
- the property is at least 40 acres.
Agricultural property owned by different entities (trusts for example) cannot be linked or considered part of the same farm for homestead classification purposes.
In general, property held in trust must have the same owner or ownership to qualify for homestead. However, property held in different trusts can jointly qualify as a homestead provided that the grantors of the trusts are:
- the individual seeking homestead classification,
- the individual’s spouse, or
- the individual’s deceased spouse.
If you change ownership of property from sole ownership to placing that property into a trust, you will lose homestead classification. However, homestead classification can be reinstated by simply completing the “Application for Homestead Classification for Property Held Under a Trust” and returning the form to your county assessor by December 15.
This is also the case for any “Special Agricultural (Actively Farming) Homestead” that includes
- land leased to an authorized entity,
- land owned by an authorized entity,
- property held in trust and leased to an authorized entity, and
- land owned by an authorized entity and occupied by a qualifying relative.
An authorized entity includes a family farm corporation, joint family farm venture, family farm limited liability company and a partnership that is operating the family farm.
Qualified small business property and qualified farm property exclusion adjustment
In 2017, Minnesota passed legislation that increases the Minnesota personal estate tax exclusion. This is the amount each person can pass to their heirs without having to pay any Minnesota estate tax. The changes are retroactive to deceased people dying after December 31, 2016.
Exclusion amounts by year
- 2017: $2,100,000
- 2018: $2,400,000
- 2019: $2,700,000
- 2020 and thereafter: $3,000,000
The Qualified Small Business Property Qualified Farm Property Exclusion decreases by an amount so when the personal estate exclusion amount and the Qualified Property Exclusion amount are added together, the total exclusion cannot exceed $5,000,000 per person unless changed by the legislature.
For example, in 2017 the personal exclusion equal to $2,100,000 could be added to a maximum of $2,900,000 Qualified Property Exclusion for a total exclusion of $5,000,000 per person.
Caution: This publication is offered as educational information. It does not offer legal advice. If you have questions on this information, contact an attorney.
Minnesota Department of Revenue Bulletin, “Trust properties and homestead determination,” Information and Education Section, Property Tax Division, www.revenue.state.mn.us.
Reviewed in 2020