AG/WILDLIFE EXEMPTIONS AND ROLLBACK TAXES

When buying a tract of land, there are many considerations that go in to deciding which site is right for you. Whether it be zoning, availability of utilities, impervious cover, trees, floodplain. All play an important role in the developability of a tract of land.

Just as important is understanding if any tax exemptions exist on the property. The most common exemption for commercial land in Austin is the Agricultural Exemption (“Ag”). The term “Ag” is often used interchangeably for two types of exemptions:

Agricultural and Wildlife Management.

Agricultural Uses – the primary use of the land may include:

• producing crops
• raising or keeping livestock, poultry, or fish
• baling hay,
• bee keeping
• timber production

Wildlife Management – managing the habitat to benefit a native or migratory species of wildlife, such as:

• Feed deer
• Create habitat for birds
• Trap predatory species

If you qualify to have an Ag exemption, your property’s value for tax calculations can be significantly reduced, sometimes as low as 0.1% of the market value. That can have a drastic impact on the annual property taxes, turning a $100,000 tax liability into a $100 burden.

While that can be a very attractive part of holding land as an investment or while you entitle the site for development, upon the change of use, a rollback tax will be triggered. The rollback tax calculation is based on the difference between the Market Value and the reduced Ag Assessed Value of the land, plus a 5% penalty per year for the last three years. Here is an example:

Market Value $1,000,000 The amount the County Appraisal District sets as full value

Ag Assessed Value $1,000 The amount you are paying taxes on (ex: $1,000,000 x 0.1%)

Deferred Tax Value $999,000 The amount you are not paying taxes on while in Ag

Tax Rate 2.5% The tax rate based on the jurisdiction the property is located

To calculate the amount you will pay in rollback taxes for each year:

• Step 1: Multiply the $999,000 of Deferred Tax Value by the 2.5% tax rate
• Step 2: Multiply the product of Step 1 by the penalty rate (5% for 1st year, 10% for 2nd year, and 15% for the 3rd year)
• Step 3: Add the total in Step 1 and Step 2
• Step 4: Repeat for other two years
• Step 5: Add the total for each year to find the amount of rollback taxes due

Example:
2020 $999,000 x 2.50% = $24,975; $24,975 x 5.00% = $1,248.75; $24,975 + $1,248.75 = $26,193.75
2019 $999,000 x 2.50% = $24,975; $24,975 x 10.00% = $2,497.50; $24,975 + $2,497.50 = $27,472.50
2018 $999,000 x 2.50% = $24,975; $24,975 x 15.00% = $3,746.25; $24,975 + $3,746.25 = $28,721.25
$82,387.50

In this simple example, where property values stayed stagnant for three years, upon the change of use, a rollback tax of $82,387.50 would be triggered.

While lower taxes will never be argued in Texas, do not overlook the potential rollback burden that you may face. Large commercial tracts can easily have a rollback tax liability of hundreds of thousands of dollars, which will impact any project’s success.

Just as every part of a transaction is negotiable, who pays rollbacks is as well. By default, it is generally the party that changes the use, therefore the Buyer post-closing. There are many considerations on how to negotiate the rollback taxes, so consult with your broker. If CIP can be of assistance in your search, call 512-682-1000, or email Josh Hubka, CCIM at josh@cipaustin.com.

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