Buying Land? Don’t Get Rolled With Rollback Taxes!

Van Alstyne Tx Horse Property With Ag ExemptionChange 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.

 Additional Resources

Property Tax Basics

Open Space (AG)  Application

Guide to Property Taxes

 

 

 

About Keith Laursen

I am a Fathom Realty Realtor specializing in town and country properties in the cities of Van Alstyne, Anna, Melissa, Howe, Gunter, Tom Bean, Whitewright, McKinney and Plano, TX.

My trusty horse and I will help you "spot" the best in real estate. Remember, it can't sell if it's not spotted!
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Comments

  1. I’m in this situation, though my rollback tax isn’t that high. I recieved a bill for rollback around June 2013. Talked to my old landlord who has sold me the land with a private mortgage, and they agreed to pay it since they promised that all tax was paid. Its my deed, my tax. But he had added to the land for sale with .5 acres of his agriculture land 2 years prior. When he did this it should have started the rollback but instead the tax collector waited until after I paid my first years tax. So I ended up with 5 years previous agriculture difference, plus interest, plus 1/2 tax for 2011 and full tax 2012.

    Now a year after they agreed to pay it, I have a tax demand notice in my mailbox, informing me that if I don’t pay my land will be auctioned. So now I have to pay the five years rollback tax, interest, plus a 15% penalty for being 90 days late. So that pretty much doubled the bill. Had they not taken the bills from me and promised to pay it, I would have paid it on time to skip the added fees. Instead they just lied and kept the bills. I had forgotten about it because they said it was taken care of.

    I think it’s complete crap that the landowners have these nonexistent tax bills through agriculture land but the difference plus interest is imposed on the new owner. That’s like saying the new boyfriend should pay for the divorce and for all debts incurred 5 years prior. Or the new tenant has to pay a fee for 5 months prior to moving in. It makes no sense. There should be recourse for people doing this. I mean when the closing attorney and sellers promise that all tax is paid prior to the buyer signing on the dotted line, it is fraud. I don’t care if the attorney didn’t know because the seller did. I didn’t know that the small piece of land was taken out of a large agriculture tract because this was done prior to my purchase. Shouldn’t the person who owned the land at the time of a split and new deed be the one responsible? I just don’t get how it’s my liability.

    • What county are you in?
      Some counties will try to work out payment plans or adjust some of the fees if you make contact in person and plead your case. If you haven’t already, you should schedule a meeting with them & remember they are just doing their jobs so be nice.

      Do you have the previous owners promise to pay any rollback in writing?
      I am guessing that the answer is no but you might try to take them to court. Was there an attorney or real estate agent representing your interests with the landlord?

      Someone should have mentioned the possibility of roll back taxes. As you can see from my article, the appraisal districts will provide an estimate of the roll back if asked.

      The person changing the use should be the one responsible for the roll back but if he just added a half acre to another parcel he may not have technically changed the use unless he built a house on it. I would try to work something out with the tax office & if not successful talk to a lawyer to see if you have any recourse with the previous owner.
      However, don’t be surprised if the previous owner wasn’t aware either until you dropped the bill on him. The roll back tax possibility is not well known to the general public. Good luck.

  2. I would like to know what triggered such a law. Why is it the responsibility of the new owner? I can see the roll-back on the current owner who received the benefit of the tax credit. What was it that triggered this law and put the responsibility on the new owner?

    • The current owner is getting an exemption due to agricultural use. The state realizes it is not fair to tax a farmer growing hay or crops for the benefit of all the same as a someone living in a mansion overlooking his acreage size yard for personal use.

      When he sells, he has no idea what the buyer’s future use will be or when. The buyer has the opportunity to keep in AG and enjoy the exemption if desired. However, if he desires to use it for other than AG use, it’s on him and the county wants to recover the taxes lost.

      Great example is there is still a farm in the middle of Plano. If they were taxed at market value, they couldn’t afford to keep it. Remember Texas is an agricultural and oil state. The state takes property rights seriously protecting that farmer. If some developer buys the farmer out, he reaps the profit of the development and can easily pay the rollback. That’s my opinion. You would have to talk to a legislator for their explanation.

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