Change Of Land Use Can Trigger Rollback Taxes
If you change what you use land for, you could be subject to five years of rollback taxes + 7% interest. Buyers frequently look for land with an “Ag exemption” for the low taxes without realizing that if they build or cease agricultural activities on the property, they can receive a huge tax bill for back taxes. This is basically the difference between the property being taxed at the lower Ag rate and the normal rate for 5 years plus interest.
How can an unsuspecting buyer be responsible?
The tax penalty falls on the owner who changes the use. This means the seller could have used a plot of land for years grazing cattle, bailing hay or other agricultural activity. Many times unsuspecting buyers will purchase larger acreage with visions of getting rich by cutting the property up into a small acreage development. Surprise, you just changed the use and the tax man can have a bill for you.
Another way this can happen is a seller may have a large parcel and survey off his home and outbuildings on say, 10 or less acres. In Grayson County, 10 acres is the minimum for an Ag exemption. However, since the use hasn’t changed (they are still using the property for agricultural purposes) it remains Ag exempt even below the minimum acreage because the adjoining owned parcel is still be used as Ag. Now a buyer comes along purchasing the home and small acreage. As long as the use hasn’t changed they “may”be OK but it will be the tax man who decides if the new use and acreage is appropriate for the continued exemption.
How much can the rollback tax be?
On a recent situation a buyer wanted to purchase a 2.2 acre lot with a tax value of aprx. 38K. This lot was incorrectly still being given an Ag exemption as it was obviously too small for serious agricultural use. It was one of many 2 acre lots surveyed out of a larger parcel and was the last one remaining unsold. The estimated rollback tax and interest on this 38K property was close to 5 thousand dollars!
The seller received the benefit of the lower tax rate in the preceding years but it could have been the buyers liability to pay them because he wanted to build a home, changing the use. In reality, the use was changed when it was subdivided to be sold as 2 acre residential parcels but that somehow fell through the cracks. Negotiations proceeded where buyer and seller were going to split the rollback but essentially the buyer was paying for half of the sellers benefit. Imagine changing the use and owing rollback taxes on a much larger parcel.
How can you be sure a property is Ag exempt and what the rollback tax could be?
Work with a knowledgeable Realtor who has done land transactions in the past, not just residential sales. Look up the property at the county Central Appraisal District. What you will see is an agricultural Market Valuation and very low taxes. The taxes on the 2.2 acre property referred to above were $4.89. That’s a big clue! You can of course call the Central Appraisal District with the parcel number and they will gladly help you. You can do a rough estimate by looking at what was paid in taxes for each of the preceding five years and figuring out what it should have been based on the tax rate. Don’t forget the 7% interest or simply request the Central Appraisal District to provide a rollback tax estimate.
Know the facts – Then Negotiate
If you are aware there will be a large rollback tax you may want your seller to pay the charge. He doesn’t have to agree but he enjoyed the benefit of low taxes and land can take a long time to sell. The seller may pay all or a portion of the tax to make the deal. The buyer may have to make the decision if this particular piece of property is worth not only the asking price but the liability of the rollback tax. Price is king and sometimes the price has to adjust based on the circumstances.
Additionally you should have an idea of what similar property in the area has sold for and the current market conditions. If the property is high-priced and has a rollback you may just want to walk away if the seller isn’t interested in budging but if it’s discounted or the seller is willing to adjust the price based on the tax then it might make perfect sense.
Disclaimer:
At the time this post was written the information was deemed accurate but tax and real estate law frequently change. Nothing in this post should be construed as legal advise, only as information that should inform you of possibilities. Always contact your local Realtor, tax adviser and attorney to determine current ramifications of any real estate purchase. Also please note that other Texas counties may have different minimums and polices regarding Ag exempt property and how they handle rollback taxes.
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