Jessica Haile and Randa Barton 2017-11-22 22:31:25
How to get an “ag-exemption” and the consequences of losing it. A growing population and trend toward “rural” living in Texas have contributed to the exploding growth in the market for “small land” transactions. Although the exact definition of “small land” varies by region, more buyers are looking for property bigger than a traditional residential lot but smaller than a working farm or ranch.1 Small land is generally defined as parcels of 200 acres or less, with the exception of far West Texas, where 500 to 8,000 acres is considered small.2 Small land parcels in most regions of Texas average around 20 acres. Exemptions vs. Assessed Value Many clients purchasing or inheriting small land have questions about the “ag exemption” or “wildlife exemption” to their property tax obligations. These “exemptions” technically don’t exist; that is, not in the way that a homestead or charitable-use exemption does. Instead, the tax benefits stem from a different appraisal method to assess taxable value based on the production capability of the land rather then its fair market value. In light of the continued growth of small land sales, being knowledgeable about these appraisal methods and how to obtain and maintain them, as well as penalties and other hazards associated with them, will serve you and your clients well. As anyone who has contested the assessed value of his or her home knows, lower assessed value equals a lower tax bill. True tax exemptions, like the homestead exemption, lower the taxable amount of the assessed value.3 Tax benefits for agricultural or open-space use are reached differently. Rather than a straight-line deduction to assessed value, qualifying property is assessed based on its production value, which is lower than the fair market value for almost all small land parcels. What many taxpayers refer to as the ag exemption is actually an alternate appraisal method. Agricultural and Open-space Use Anyone familiar with agribusiness knows the purchase price doesn’t come close to annual operating income. In 1966, voters approved an amendment to the Texas Constitution allowing agricultural land to be appraised based on its capacity to produce revenue instead of market value.4 This appraisal method is available for acreage owned by an individual or family5 whose primary occupation is farming, ranching, or other agribusiness, and whose property is primarily and exclusively used in that business.6 This is a difficult standard to meet for someone who buys land as a weekend getaway or who works in a city but lives a few miles away on a 10- or 20-acre tract. In 1995, voters authorized the open-space appraisal method, which does not require the owner to be a full-time farmer or rancher, provided that the property is used primarily for agriculture. 7 This broadened the properties eligible for special appraisals substantially. Regarding open-space appraisals, “agriculture” is broadly defined to include participating in conservation programs, cultivating plants, beekeeping, and wildlife management.8 Wildlife management is often the most accessible of the special valuation methods for part-time or recreational rural landowners. Eligibility requirements are generally less strict than those for agricultural appraisal qualification, making the method more appropriate for property (or owners) not suited to full-time agribusiness. Qualification Process To qualify for a special appraisal method, application should be made to the county appraisal district by May 1. Applications are available through the county appraisal district.9 An agricultural use appraisal must be applied for and approved each year, whereas an open-space appraisal only requires reapplication upon a change in ownership or type of use. Agricultural use appraisal. An agricultural use appraisal requires that, as of January 1, the landowner’s primary occupation and source of income was agriculture and that the land has been devoted exclusively to or developed continuously for agriculture for the preceding three years. The owner must intend to continue this use and occupation for the current year. Open-space appraisal. Approval of an open-space appraisal requires that the land be devoted principally to agricultural use (including wildlife management) at the time of the application, rather than January 1, and has been devoted principally to agricultural use for five of the last seven years. Additionally, the agricultural use must be to the same degree of intensity as generally accepted in the area, as determined by the appraisal district. Wildlife management use. If applying for an open-space appraisal based on wildlife management, you should also consult the Texas Parks and Wildlife Department’s extensive resources regarding special appraisals.10 Some appraisal districts may require written wildlife management plans, and regions may have different definitions of active wildlife management. The comptroller’s guidelines for open-space qualification prohibit arbitrary acreage minimums, but the TPWD and appraisal district are permitted to establish guidelines appropriate to the region. The process for having a wildlife management plan approved takes planning and continued effort by the owner, as well as cooperation and communication with appropriate authorities, including the appraisal district, the TPWD, and the local office of the Agricultural Extension Service.11 Rollback Taxes and Change in Use If an owner changes the use of property and loses eligibility for a special appraisal method, rollback taxes may be incurred. The tax is the difference between taxes actually paid in the years preceding the change and the taxes that would have been assessed based on market value without a special appraisal, plus accrued interest (currently 7 percent).12 For a special appraisal based on agricultural use, a change in use or the sale of the property may trigger rollback taxes covering the previous three years.13 For special appraisals based on open-space use, a change in use (but not the sale of the property) may trigger rollback taxes for the previous six years.14 The rollback taxes, including accrued interest, are due with the current year’s taxes (that is, on or before the following February 1).15 If an owner continues to use land for agriculture but does not maintain the degree of intensity typical for the area, the land may lose eligibility for special appraisal; however, assessment of rollback taxes will depend on whether the reduced intensity is due to factors outside the owner’s control.16 “Reduced intensity” due to an owner’s voluntary actions may be considered a change in use and incur rollback taxes, although reduced intensity due to factors outside an owner’s control, such as drought, fire, or flood, will not.17 Similarly, if a change in use is due to an owner constructing a homestead on the property, rollback taxes will not apply, provided that the owner maintains the residence as a homestead for five years.18 Change in use exemptions also exist for property transferred due to condemnation or rights-of-way, grants to charitable organizations, and other specific conveyances.19 Penalties also apply for failure to report a change in use, whether or not due to a change in ownership. Failures to notify the appraisal district of a change in use can incur a penalty of 10 percent of what the rollback taxes would have been for the applicable years.20 And regardless of the reason for a change, or of an owner’s knowledge of a change in use, owners cannot challenge appraised values for prior years; challenges can only be made in the year in which the values are established. 21 The Legislature has provided some protection for buyers by requiring specific disclosures regarding applicable special appraisal eligibility in contracts for real property sales.22 Agricultural and open-space appraisal methods will continue to become more important as Texans continue to purchase small land tracts. Attorneys involved with real estate transactions, even those of a few acres, need to be aware of eligibility requirements for special appraisal methods, usage changes, and the requirements for continued eligibility for these valuations—and advise clients accordingly. Notes 1) For example, see the Texas Association of Realtors’ 2017 Texas Small Land Sales Report regarding growth for this market. 2) Texas A&M University Real Estate Center, Texas small land sales jump 14 percent, price per acre declines in 2016, https://www.recenter.tamu.edu/news/newstalk-texas/?Item=16949 (June 23, 2017). 3) Tex. Tax Code § 11.13(b). 4) See id. § 23.41(a); this method is also referred to as the “Section 1-d” method, referring to the applicable section of Article VIII of the Texas Constitution. 5) The eligible owner pool expanded in 1979 to include corporations, LLCs, and other entities. 6) This is also referred to as the “Section 1-d [method], productivity valuation, productivity appraisal, [and] special appraisal.” Texas Comptroller of Public Accounts, Manual for the Appraisal of Agricultural Land, (the “Comptroller’s Manual”), at 1 (2017). 7) See id. Also referred to as the “Section 1-d-1” appraisal method. 8) Tex. Tax Code § 23.51(2). 9) See https://comptroller.texas.gov/taxes/property-tax/forms/ for a complete list of special appraisal forms. 10) Texas Comptroller Of Public Accounts, Guidelines for Qualification of Agricultural Land in Wildlife Management Use, (October 2007), available at https://tpwd.texas.gov/landwater/land/private/agricultural_land/. County appraisal districts may have their own guidelines and should also be consulted, especially if the qualifying use is wildlife management. 11) Tex. Tax Code § 23.521(b). 12) See id. § 23.55(a). 13) See id. §23.46(c) and 23.55(a). 14) See id. § 23.55. In addition, if an open-space appraisal was erroneously applied for any of the previous five years, the rollback tax can stretch five years prior to the date the change actually occurred, meaning the obligation could cover 10 years. 15) See id. §23.46(c) and 23.55(a). 16) See id. § 23.522, Temporary Cessation of Agricultural Use During Drought. 17) “Comptroller’s Manual,” at 29-30. 18) Tex. Tax Code § 23.55(i); see also id. at 30 (the statute is silent as to the length of time, but manual provides a five-year guideline). 19) See id. § 23.55. 20) See id. § 23.54(h). 21) See, e.g., Bexar Appraisal District v. Sivage Investments, Ltd., et al., 2014 Tex. App. LEXIS 12472 (mem. op.) (Tex. App.—San Antonio, Nov. 19, 2014). 22) Tex. Prop. Code § 5.010. JESSICA HAILE is a graduate of Baylor Law School and a shareholder in McMahon Surovik Suttle in Abilene. Haile primarily practices in the areas of commercial litigation and creditors’ rights. She may be contacted at email@example.com. RANDA BARTON practices business law at McMahon Surovik Suttle in Abilene. She graduated from Baylor University and SMU Dedman School of Law. She may be reached at firstname.lastname@example.org.
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