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.