"Property owners must stay vigilant to maintain agricultural-use status on farmland and avoid financial penalties..."
Local governments are under the greatest financial stress since the Great Depression, and assessing authorities are aggressively pursuing revenue to combat these financial woes. One target in assessors' crosshairs is the preferential tax treatment of land with agricultural status.
Developers who are considering the purchase of agricultural land or holding acreage for eventual development need to be aware of the potential tax consequences. Depending on the way assessors categorize the land, the owner could face an unexpected rise in tax costs.
All states offer some tax relief for qualified agricultural property, but each jurisdiction has specific and often complex legal requirements for agricultural status. Investors in land held for future development must know the laws governing agricultural status if they hope to maintain this preferred tax position.
Most real estate is assessed at market value, which typically reflects the most probable price a buyer would pay in a competitive market. The most common benefit of an agricultural designation is that the land is assessed at use value instead of market value. Use value reflects how the property is currently used, i.e., for agriculture, rather than its highest and best use, which may be for residential or commercial development.
Eligibility for agricultural status varies by jurisdiction. The following are the major eligibility requirements.
Check for penalties
Many states impose a penalty when farmland is converted to non-agricultural use. In some states the penalty takes the form of a recapture or rollback tax, which is the difference between the taxes that would have been paid and the taxes actually paid while the land qualified as agricultural. This recapture period varies between three and 10 years.
In other states, if farmland is converted from agricultural use within a certain period after qualifying for preferential treatment, penalties are calculated based on the property's fair market value when its use changes or it is sold.
Most states require owners to periodically submit extensive information to demonstrate that the land continues to be used agriculturally. This may include IRS Form 1040F, leases, invoices and receipts, among other documents.
Each state's eligibility requirements, application process and potential penalties play a part in determining whether properties qualify for agricultural status. But a property's agricultural status can translate into significant tax savings. Local counsel may be required to navigate the complexity of obtaining or maintaining the agricultural status.