Resource Library

Understanding Coverage for Tax-forfeited Property

Date: July 2020

Twice a year, property owners in Minnesota are required to pay property taxes. Unfortunately, some property owners fail to fulfill this obligation, which results in delinquent taxes. Counties must follow a legally prescribed process to collect the unpaid taxes—a process that may take many years. It is important for members to understand how coverage may apply during the tax-forfeiture process and for tax-forfeited property.

Tax Forfeiture Process

When property taxes are not paid in the year they are due, they become delinquent in January of the following year. To begin the process of collecting the outstanding obligation, the county is required to give notice of the delinquency to the property owner and commence a district court action to seek a judgment against the property for the amount of the delinquent taxes, penalties, costs and interest to date.

When judgment is entered in the district court action, generally in May of the year the taxes became delinquent, a lien is created against the property. The date of the judgment begins the period of “redemption,” which is one or three years from the date of judgment, depending on the ownership, use and location of the property. The delinquent taxes can be paid by the property owner or another person with an interest in the property at any time during the redemption period. If payment occurs, the forfeiture process stops.

If the taxes remain unpaid after the redemption period has expired, the property will be forfeited to the State of Minnesota. This process requires that the county auditor give notice that the time for redemption has expired and the property can be purchased pursuant to the tax judgment.

If there are no purchasers, the county auditor submits a bid for the property on behalf of the State, which is generally the amount of the delinquent taxes, penalties, costs and interest. At this time, the title to the property is transferred to the State in trust for the local taxing districts (county, school district and city).

Counties become obligated by statute to manage and maintain the tax-forfeited property located within their boundaries once the title transfers to the State in trust for the taxing districts. As counties manage and maintain the property, their goal is to encourage the best use of the property, return it to productive taxable property or put the property to public use or purpose.

The county auditor and county board are responsible for disposing of the tax-forfeited property. Many steps in the process must be completed before the property is ready for disposition, specifically:

  • the property is removed from the tax rolls;
  • all real property tax and special assessment liens on the property are canceled;
  • the parcels of land are classified as conservation (stays in public ownership and not available for sale except through special legislation) or nonconservation (released for sale); and
  • the parcels are approved for sale and the appraised value is established.

Tax-forfeited property can be disposed of in one of the following manners:

  • re-convey the property to the prior owner under a repurchase agreement
  • convey the property to a political subdivision free of charge for a public use
  • sell the property to political subdivision or state agency for a public purpose
  • sell the property to a third party at a public auction or private (adjacent) owner sale

Property Coverage

Because the county’s obligation in the tax-forfeiture process is to manage and maintain the property when the title is in the name of the State and the State holds it in trust for the taxing districts, the property is treated differently than property owned by the county. Thus, MCIT’s coverage for the tax-forfeited property is different.

MCIT’s property coverage is designed to provide coverage against direct physical damage to property resulting from a covered loss. MCIT provides this coverage to property that the member owns, has an insurable interest in or is under obligation to cover. The county/MCIT member does not own tax-forfeited property but is responsible for managing and maintaining the property.

Property coverage for tax-forfeited property is provided on an actual cash value (ACV) basis. This is calculated by subtracting depreciation from the current cost to replace the building with one of like kind and quality. The amount of any delinquent taxes or the market value of the property is not considered in establishing ACV. The county board determines the appraised value of the property at the time it resolves to dispose of the property.

Unlike a member’s standard property (buildings and property in the open) that has automatic temporary property coverage for 60 days from the date of acquisition, coverage for tax-forfeited property is excluded. The member must specifically request that tax-forfeited property be added to its property schedule. Because vacant buildings acquired through tax forfeiture have typically depreciated significantly, members often choose not to purchase property coverage.

If property coverage is desired, members may request coverage by submitting an online schedule change request through the MCIT member portal and a coverage endorsement will be issued.

Liability Coverage

Generally, MCIT’s liability coverage applies when a member becomes legally responsible for the tax-forfeited property; that is the point when the Auditor’s Certificate of Forfeiture (COF) is recorded in the county recorder’s office. The COF is evidence that the auditor has followed the statutory procedures and that the property described in the certificate has vested in the State in trust for the local taxing authorities. The redemption period (generally one or three years) begins after the COF is recorded. The county is obligated to maintain the property during this time.

MCIT’s general liability coverage is designed to pay sums the member becomes legally obligated to pay for damages arising out of an accident or occurrence resulting in bodily injury or property damage as defined in the MCIT Coverage Document. MCIT’s general liability coverage follows the member’s operations, and processing tax-forfeited property is considered an extension of the county’s operations for the purposes of premises liability coverage.

MCIT’s liability coverage automatically extends to vacant tax-forfeited land and unoccupied single-family dwellings (i.e., houses) once the county becomes legally responsible for such property. Buildings, including houses that are occupied may have special coverage considerations requiring additional lessor’s liability coverage as discussed below.

MCIT’s public employees liability (PEL) coverage is designed to cover damages (other than bodily injury and property damage) arising from wrongful acts on the part of the member, subject to several exclusions. One such exclusion relates to claims arising from the taxation process and specifically claims arising from the disposition of tax-forfeited property.

The process leading up to the recording of the COF or the commencement of the redemption period for tax-forfeited property is considered a taxation issue, so MCIT coverage does not apply to claims arising from those activities. However, MCIT coverage applies once the county initiates the administrative process of disposing of the tax-forfeited property, which includes filing paperwork, posting notices, finding buyers, holding an auction and concluding the sale.

Special Requirements

Members should contact their MCIT risk management consultant to determine when there are special considerations for coverage of tax-forfeited property after the time that the county becomes legally responsible for the property. The following situations may warrant special attention for coverage:

  • when tax-forfeited property is a commercial building
  • when tax-forfeited property is rented or leased to others for commercial or residential purposes
  • when tax-forfeited property has an actual cash value that exceeds $1 million

Risk Management Recommendations

Tax-forfeited property poses unique risks in comparison to typical member property. MCIT recommends that members take the following steps to manage these risks:

  • Develop and follow policies and procedures for tax-forfeited locations. The Minnesota Department of Revenue provides the Delinquent Real Property Tax and Tax Forfeiture Manual (Red Book) as a potential resource.
  • Evaluate the types of coverage necessary for the location, e.g., property, liability, lessor’s liability.
  • Discuss leased forfeited property with MCIT, as there are both property and liability exposures, and coverage implications when the property is used for commercial or residential purposes.
  • Inspect the location for potential exposures, including tripping hazards, open or unsecured buildings, broken glass and snow or ice buildup. Keep in mind that the property could be considered an “attractive nuisance,” which more or less invites trespassers, creating an increased liability exposure.
  • Members should consider posting warning signs, such as “No Trespassing Allowed,” and, if vacant, secure the building to prevent unauthorized intrusion.
  • Monitor the location with continued inspections and occasional drive-by evaluations. Consider notifying law enforcement of the tax-forfeited location for its assistance in monitoring it.
  • Develop a maintenance plan for the location, which should include routine inspections, grass mowing, snow and ice removal, repair of tripping hazards, and have a clear understanding of who is responsible for performing the maintenance.

    What Are Noncovered Exposures?

    MCIT suggests that counties consider potential risks associated with administration of tax-forfeited property:

    • Property coverage excludes losses resulting from, among other situations, pollution, gradual deterioration, wear and tear, vermin, insects, inherent vice and interruption of incoming services.
    • Liability coverage excludes claims related to asbestos, silica, pollution and the taxation process.

    To mitigate the county’s risk of loss, it should inspect the property and take corrective action based on the condition, location and use of the property.

The information contained in this document is intended for general information purposes only and does not constitute legal or coverage advice on any specific matter.