Thursday, December 19, 2013

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”


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. 

Friday, December 13, 2013

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.

Tuesday, December 3, 2013

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.