Understanding rollback taxes and ag exemptions

Rollback taxes can be defined as property taxes that are assessed due to the loss of an agricultural exemption on the property, for periods of time that PRECEDE the removal of that exemption. Only ag-exempt land can have rollbacks tax liability.  The rationale is that because the taxing authorities gave the landowner a huge tax break for many years for using the land as agricultural, then such taxing authorities should get to re-capture some prior years of lost tax revenue if and when that use changes.

 There are two types of ag exemptions:

1.            An exemption Texas Tax Code, Chapter 23, Subchapter C, for “true” ag land.

This type of exemption is less common.   To be eligible, “agriculture” must be the “primary occupation and primary source of income” for the landowner / applicant.

This is exemption is primarily intended for, and used by, true farmers or ranchers.  

The exemption is lost / removed if the land under the exemption is either sold or diverted to a non-agricultural use. The rollback period is THREE (3) years preceding the year in which the exemption was removed.

This exemption is sometimes referred to as the “1-D exemption”

2.            An exemption under Texas Tax Code, Chapter 23, Subchapter D, for “open space” Ag land.

This is the more common ag exemption.  The landowner does not have to be in the business of agriculture as their primary occupation, or at all.   Real estate investors use this exemption to keep their taxes / carrying costs low, while holding the land for investment purposes and eventual re-sale.   Usually the investor leases the land out to a farmer for crops or cattle or both, and that use permits the exemption to be earned.   Sometimes the tract is so large and the tax savings so large that the landowner will actually PAY the farmer to farm the land (payments are usually minimal).

Most ag leases are terminable on 30 days notice, but termination before crop harvest may have “crop damage” payments due from the landlord for loss of ability to harvest.

This exemption is lost / removed if the land under the exemption changes its use, whether by the current owner or a new owner.  Note that sale is not an automatic trigger – change of use is.

Sometimes partial sales and development of tracts within a large ag tract will cause the loss of the exemption on the entire tract, and owner may have to protest or re-apply.

The rollback period is FIVE (5) years preceding the year in which the exemption was removed.

This exemption is sometimes referred to as the “1-D-1 exemption”

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When selling ag-exempt land, there are several issues to consider.  Since rollbacks are going to be an expected liability, it is best to get them calculated prior to marketing the property.  Title companies can hire their tax services to do this, and some appraisal districts will do this as well.  

Then, account for this cost in the negotiations.  These rollback taxes can be paid by seller or buyer in the contract.  Look closely at this section of the contract and modify as needed. 

Should a seller terminate an ag lease ?  It depends.  If the purchaser intends to convert ag property to a different use, yes. 

But if the purchaser is an investor, and wants to hold the property for later sale, it may want the seller to keep the ag exemption in place and keep the taxes low .   It’s a good idea to discuss this issue with the purchaser, as they will be eventual owner of the ag land. 

And be careful about terminating before feasibility of purchaser has expired.  What if the purchaser walks on the deal ?  Then the lease is gone and the ag exemption may be lost. 

Are contracts freely assignable ?

Real estate contracts, like most other contracts, are generally assignable unless (i)  assignment is prohibited by the contract, (ii)  assignment would materially alter the duties of or increase the risk to the non-assigning party, particularly where the skill, character, or credit of the assigning party is important, or (iii) the assignment is prohibited by law or public policy.  Lancaster v. Greer, 572 S.W.2d 787, 789 (Tex. Civ. App. -- Tyler 1978, writ ref'd n.r.e.);  Zale Corp. v. Decorama, 470 S.W.2d 406, 408 (Tex. Civ. App. -- Waco 1971, writ ref'd n.r.e.).

 In our opinion, the character or credit of the buyer is usually important to a seller.  A buyer should not presume that they can freely assign, and they risk a lawsuit by a seller if they do so without written consent, either from the seller or in the contract.

Putting “and/or assigns” following the buyer’s name in the contract is the quick and dirty method to expressly permit the assignment of the contract by a buyer.  Is the Seller released after assignment ?  

Probably not unless the contract expressly says so. However it is not totally clear – a good assignment clause which makes this issue clear would be better.  In these instances, both assignor and assignee are probably jointly and severally liable to the seller.

When it is time to assign, an assignment of contract form can usually be provided by the title company or their counsel.   This form is signed only by original buyer (the “assignor”) and the new buyer (“assignee”). A copy is then provided to title company, all brokers, and the seller. The assignee generally / usually agrees to indemnify and hold the assignor harmless from breach of contract claims that arise from conduct post-assignment.    The assignor generally / usually agrees to indemnify and hold the assignee harmless from breach of contract claims that arise from conduct pre-assignment.

My buyer / seller died. Now what ?

A real estate contract does NOT terminate at the death of a party, and the estate of a party is bound by that contract if the other side wants to try and enforce that contract in a court of law – which would probably be a probate court.    The still living party would perhaps even have to OPEN a probate action on the estate of the other party to the contract.  

The reason that most deals “die” with the death of the party is the cost and trouble to do exactly this.  

And most folks do not see the sudden and unexpected death of a party as a default, and thus it is common and perhaps inherently fair to release the earnest money back to the buyer and for both sides to say “sorry, we tried.”

The title company, in releasing the earnest money, usually just wants some semblance of authority on behalf of the deceased party to sign a release.  So if the buyer died, then the title company would try to ascertain who the intestate “heirs” of that buyer are – often the spouse, or the kids if the person is single.   That heir or heirs would sign the release on behalf of the deceased buyer’s estate (no, they don’t need to probate the will unless perhaps we are talking about a huge commercial deal and huge earnest $$) and the seller would also, and we would be on our way.

If the deceased was the seller – same idea.   Heirs would be determined (title company will help with that) and they would sign the release and the buyer would also, and the earnest money would, in our perfect scenario, be returned to the buyer.

Could you have a situation where the death of the party is viewed as a “default” by the other party, for failure of their estate to close on the contract as written, and they want the earnest money ?  Perhaps, but death right before closing is rare enough.   Death right before closing coupled with unreasonable sellers is even rarer. 

Ha !!  I’m being tacky.   But I have a point of view, and its entirely personal.  I think if you die, the other side should give your heirs a break and not punish them financially for your sudden demise.   But not everyone has to feel that way.

  

Same-sex couples face challenges to co-own real estate

Presently the State of Texas does not recognize same-sex marriage.  Implicit in the current state of the law is the inability for a same sex couple, even one married legally in a state which recognizes such marriage, to obtain a divorce in a Texas court.

So if a same sex couple desires to hold title to Texas real estate, jointly, how do they deal with such real estate when they no longer wish to remain together ?    Unlike an opposite sex marriage, such couples cannot use a divorce court to divide assets of the marriage.  Unfortunately, some same sex couple just accept such limitations and have made little planning to deal with the potential problems of jointly owned real estate.

Some couples use a "joint tenancy" or "joint tenancy with right of survivorship" to jointly hold title to real estate -- but there are some limitations imposed by such ownership.   First, Texas law does not favor joint tenancies and construes any attempt to create them very strictly.  They must be created with the written agreement of both joint tenants, and clearly evidence their intent to create a joint tenancy where the survivor would take title to the whole of the jointly owned property.   Careful drafting must be used to ensure that a true joint tenancy, with survivorship qualities, is created.

Second, a joint tenancy only deals with one situation -- death.  It does not deal with the need of one  joint tenant to buy the other out, or to sell if the other owner does not desire to sell.  Without good real estate planning, the only recourse for two co-owners who cannot file for divorce in Texas is to file a partition lawsuit to ask a court of law to divide the jointly owned property -- or, in the case of a single family residence, which often cannot be truly and fairly divided, to order the property sold and the proceeds split.   Such lawsuits are expensive and slow.

The best solution currently available in Texas is for same-sex couples to take title in a well crafted limited liability company or limited partnership.  These vehicles can be drafted to contain buy-sell provisions, to allow one co-owner to trigger a buyout or sale of the other co-owner, to allow sale to third parties, to grant preferential rights to purchase the other co-owner's interest before sale to third parties, and dissolution of the partnership in the event of bankruptcy, death, or other events of "default" however defined by the agreement.  Holding title in a business partnership is perhaps the best way for same sex couples to jointly own real estate in Texas.

Problems with Powers of Attorney

Often we are asked by title companies and their closing teams to prepare a power of attorney for parties that cannot sign at closing.

While humans, signing in their individual capacity, are fine to delegate their powers to other humans, a POA given from a trust, corporation, executor, administrator, limited liability company, partnership or similar "entity" or fiduciary is not favored by the law or the courts.  For such reasons, we usually decline to draft them this way, and try to steer the requesting party to a different solution.

In the case of a corporate entity such as an LLC, corporation, partnership, etc., the person signing on behalf of that entity has been entrusted with powers on behalf of the entity.  That trust and that appointment to sign on behalf of that entity is special under the law.  In the case of a corporation, the shareholders had a special meeting to elect the directors, and the directors then elected the officers, and the directors may have also had a special board meeting just to choose which officer can sign for that entity in that particular sale or refinance transaction.  Once appointed by the decision of the board, a person cannot (generally) just delegate their special powers to sign on behalf of the corporation (or LLC, or LP) to anyone they want, just because it's inconvenient for them to sign.   They were chosen.   If they cannot act, the corporation, through its board of directors, must pick someone else to sign.  So the solution is a new corporate resolution to pick a new person to act and sign.

Same idea goes for fiduciaries such as trustees, executors, etc.  They are "entrusted," quite literally, to act on behalf of a trust or an estate, and they can't just delegate their special powers via POA to anyone they want (generally).  The solution here, if they are unavailable, is to go back to the will or the trust and see who bats #2 -- trusts and wills often have alternates that can step up and act, although it may take some court action in the case of a probated estate.

Notice that I have said "generally" throughout -- sometimes we permit the use of POAs in these situations because we are in a time crunch, or some other similar bind.  But that decision and analysis is done on a case by case basis, as it involves a review of "discretionary" vs. "ministerial" duties of the agent.  Sometimes trust agreement will have language that does expressly permit the employment and use of "agents" and attorneys-in-fact to accomplish the wishes and agreements of the original  trustee, and there is law in Texas that suggests that if the agent or attorney-in-fact is simply performing the ministerial duty of signing that fiduciary's name to a document, and is not exercising discretion in what is being signed, that such authority might not violate the law or the original powers delegated to the fiduciary or corporate officer. 

Help ! I've put my girlfriend in title and now....

I seem to recall years ago, when Justin Timberlake and Britney Spears were boyfriend / girlfriend, that they bought an expensive Malibu house together -- while still single.   Their breakup and subsequent dispute over the ownership of that house probably fed their respective lawyers for a little while.

Bottom line, if you someone goes into title on a piece of a real estate with you, they are a co-owner.  As co-owners, the two (or more) of you will have to agree on any plans to sell, lease, or mortgage that co-owned property.

If the co-owner is your spouse, then you generally have the benefit of family laws and divorce procedures to deal with jointly owned real estate if the two co-owners (called "cotenants" under law) cannot agree on what to do with the property. 

But if the two cotenants are brother-sister, or boyfriend-girlfriend, or a same-sex couple, they may not have the benefit of divorce laws and procedures to split the property (comment:  The author is licensed to practice law only in Texas, and presently Texas courts do not authorize divorce for same sex couples, which may not be the case in other states).   So what happens in those instances ?

The best thing to try and achieve, and which should be a guiding principle in these negotiations, is to avoid a court of law.  A settlement, documented by an attorney and signed by the cotenants, is the goal here.   Co-tenancy litigation is expensive and slow and a terrible way to solve any dispute -- although sometimes there is no other option, especially if there are numerous co-owners (e.g., inheritance by many heirs).

Sometimes its as simple as a deed to move title from one person to the other.  Sometimes its a deed coupled with a document called a "Deed of Trust to Secure Assumption," which secures the conveying co-owner in the event there is a joint mortgage that the "selling" co-owner is still liable on.  Sometimes its an agreement to pay or split equity upon sale or refinance.  Your attorney will be able to offer counsel to guide and document your choices.

For forward thinking cotenants who cannot use a divorce proceeding to deal with these issues, a partnership or LLC agreement might be an excellent planning tool.  These agreements are used in business all the time between partners or members of, respectively, a partnership or limited liability company, to pre-determine what happens if one partner wants to leave the partnership, buy out the other, sell to a third party, gets divorced, gets married, goes bankrupt, or dies.  Although more expensive that just a simple deed putting you into title jointly with another owner, it will, if properly drafted, have all the major details and possibilities mapped out.

Equitable Liens in divorce

Why do title companies review divorce decrees ?

Several reasons, really.   The first and primary question is they want to see if either spouse was awarded the property in question.  

If one spouse was awarded the property, the next question is:  Did the "buying" spouse "pay" anything for the transfer of that property ?  If so, what ?

"Payment" for the division and allocation of community property assets in a divorce might simply be division and award of named listed property.   You take these assets listed here, I will take these assets listed there, you will pay this debt listed here, and I will pay that debt listed there.

But if the division is unequal, or there aren't enough assets to divide evenly or they otherwise can't be cleanly divided, perhaps the deal struck in the divorce agreement is to have one spouse literally pay the other one for the award / transfer of the property to one spouse. 

This payment can be done a number of ways.  Some divorce decrees will call for a lump sum payment, or series of payments, by the purchasing spouse within certain deadlines.  This is essentially a debt owed under a payment deadline or payment schedule.  Although not evidenced formally by a promissory note, it is still a debt, created by agreement of the spouses and then confirmed by order of the court. 

Other divorce decrees will go further, creating such debt and requiring the execution and delivery of a promissory note under which the payments are owed. 

And sometimes the divorce decree will create, in the decree itself, a formal lien to secure such debt or promissory note -- often called a lien of "owelty."  (A very strange word indeed which is often misspelled by this author.)   An owelty lien could also be additionally secured by a formal deed of trust, executed by the purchasing spouse, and recorded as a mortgage lien in the county land records.  

As you know, title companies are very interested in liens, and making sure they are paid and released, as a condition to insuring title to a new buyer.  So that is another reason why divorces are scrutinized as part of the closing process.

Q:   What if a divorce decree awards one spouse the property, requires the other spouse to pay for it, but is silent as to any lien or other security to ensure such payment is made ?  If there is no express lien, then the title company doesn't care about verifying that payment, do they ?

A:   They DO care about such payment.   Under common law, a lien can be "implied" (imposed by law) anytime the vendee (think buying spouse) does not pay the full purchase price for the property conveyed, and owes additional payments / $$ to the vendor (think selling spouse).  This lien is sometimes called an "equitable lien" because it is imposed by a court in equity, as a basic remedy to right an injustice.  

Selling spouse:   "You didn't fully pay me for that real estate -- so in all fairness, the court should use its powers in equity to impose a lien in the property for my benefit, and that would allow me to foreclose such lien or otherwise rescind the deed / title I previously gave to you, as a remedy for your non-payment."

Wow.   Really ?   Yes.

If you hold title from your ex, and you are making payments to your ex for the award of that property to you -- or the award of a BUNCH of community assets to you which INCLUDES that property -- your property probably has a lien on it to secure those payments.   You will have to pay up before you can sell or refinance through a title company.  Or if you have already paid, you had better be able to prove you made those payments to your ex, or get your ex to sign a release evidencing that he or she has been paid everything for your title.  

Some folks get quite surprised by this requirement right before closing.  

Away We Go !

First post in the new blog !  How exciting.

What we will try to do here is start simple.   I intend to blog most real estate, contract, and title insurance concepts, issues, problems and solutions for folks to learn and perhaps lend their thought on.  So the first post will be something we are working on right now.

Welcome everybody.