What Is Agricultural Land?
Agriculture includes cropland, pastureland, orchards, groves, vineyards, nurseries and ornamental horticultural areas as well as enclosed feeding areas such as pig farms or cattle ranches.
Agriculture accounts for over four out of every five acres used globally and this data can be seen here in two ways; overall or per type and in hectares.
What is Sale of Agricultural Land Taxable?
Agriculture land is an integral component of our economy and provides many jobs. Unfortunately, in certain regions it has also been threatened by urbanization; therefore governments have implemented policies giving preferential tax treatment to agricultural lands.
Multiple states and localities have implemented policies designed to limit conversion of prime farmland near urban fringes into residential, commercial, or industrial development. Policies vary by state but generally involve agricultural lands being assessed at reduced rates or otherwise differently than other properties.
An agricultural assessment requires land to be utilized for cultivating crops or livestock, such as cropland, pastureland, orchards, vineyards, sugarbush or farm woodland. Furthermore, properties set aside or retired under soil conservation programs or Federal supply management could qualify.
Under Section 54B of the Income Tax Act, agricultural land can sometimes be transferred without incurring capital gain tax when sold to another individual or HUF without incurring capital gain tax liability. To claim this exemption, however, two years must have elapsed since its use for agricultural purposes either by an individual, their parents, or HUF before transfer occurred.
A farmer who sells non-farm land must report any gains as ordinary income in the year of sale, although deferring this gain by allocating some of his purchase price towards improvements and deducting depreciation each year will delay recognition of income and allow him to be in a lower tax bracket when selling his land.
Tax sales may also be necessary if a taxpayer decides to convert agricultural land from its approved use into another nonagricultural one, and an assessor determines this by reviewing each case individually; these conversions can either be voluntary or involuntary – such as oil and gas exploration activities, extraction activities and even eminent domain.
As soon as a landowner opts to convert agricultural land to nonagricultural use, an agricultural assessment will remain in place for eight years or five if located within an agricultural district. Once converted, payments must be made as well as annual interest accruing at six percent per year compounded on any tax savings attributable to that conversion.
What is Agricultural Land Tax Exemption?
The agricultural land tax exemption is a state-level property tax break designed to benefit those using their land for agriculture. You could potentially save up to 50% off of your tax bill for farmland if eligible. It can be particularly helpful if you operate as a small farmer or hobby farm.
Eligibility requirements vary by state, but as a general guideline land must have been used in agriculture for at least two years prior to applying, with gross sales revenue of at least $10,000 being generated on average annually. You will need to submit both an application and certified copy of your farmland tax statement before approval will be given.
A soil and water conservation district technician will assess your farmland to see whether it meets eligibility for their program. You must submit a detailed narrative describing its usage, a sketch of its property and an estimate of how many acres are actively dedicated to farming activities.
Applying for an agricultural assessment on multiple parcels that make up one operation requires individual approval from the Assessor-Treasurer; otherwise you can file an appeal with the County Board of Equalization if your request is denied.
No matter your status, if you decide to continue agricultural production on your property or convert it for nonagricultural use, then all taxes that were exempted as part of an agricultural assessment will have to be paid back – including interest charges if necessary. Failure to do so could result in tax sale proceedings against your land.
Conversions can be defined as any act that changes the use of land from agricultural to nonagricultural use, whether by abandonment, sale to an owner who has not signed an Agreement to Discontinue Use (NOD), or permitting it to become vacant and eventually unoccupied. Examples include abandoning parcels and selling them without signing NOD agreements as well as abandonment by existing residents who no longer occupy them and allowing vacant lots to become unoccupied land parcels.
Oil and gas exploration and extraction activity as well as involuntary proceedings (eminent domain) that result in conversion to nonagricultural uses do not qualify for an agricultural assessment but may still receive payment as conversion compensation.
What is Agricultural Land Tax Rollback?
Agriculture land is typically assessed with a lower tax rate if it meets certain criteria, such as acreage requirements, production levels and income from farming. This tax rate typically remains below its market value and serves to keep land in agricultural use for several years longer, providing food supplies and open space to be enjoyed by public audiences.
As land use changes (for instance the addition of a house or mobile home, commercial activities on existing sites, subdivision lots below certain sizes (vacant land lying dormant is not considered agricultural use) occur, the property will likely be assessed at an increased tax rate and rollback taxes may apply; rollback taxes would cover any disparity between its assessed land use value and fair market value – for the year of change as well as three to five years prior.
Each January 1, your property must be in an eligible use that generates either livestock, livestock offspring, or crops that meet qualifying standards.
Some counties have implemented sliding scale ordinances where those purchasing farms sign a contract committing them to agricultural use for an agreed upon period. Should their plans change and they convert the land for residential or commercial use within that period, any deferred taxes due will need to be repaid from when they signed their agreement.
An alternative method would be to divide up part of the land into several tracts that remain under agricultural use programs – these should never exceed 10 acres in size.
Thirdly, one could operate a commercial enterprise on some portion of enrolled land without interfering permanently with agriculture production on two acres that remain eligible for preferential assessment – though this will usually reduce the total area that qualifies for preferential assessment and therefore potentially trigger rollback taxes.
Owners of farmland assessed under the agricultural valuation program must notify their Appraisal District within sixty (60) days of any change in legal ownership or legal description; failure to do so could cause their property to lose eligibility for agricultural valuation programs and may lead to changes in assessment amounts. They must submit a new application within six months and pay any necessary fees or rollback taxes associated with their parcel of farmland.
What is Agricultural Land Tax Rate?
Agricultural land tends to be taxed at a lower rate than other forms of property due to its reduced maintenance and service needs compared to residential or commercial properties, leading to less revenue generated for local governments from taxes collected on it. Furthermore, farmland provides valuable public goods like water filtering, storage and wildlife habitat as well as recreational opportunities that reduce overall spending costs for services provided on it.
Differential assessment programs, or current use assessments, lower property taxes on farmland to promote its continued economic viability; farmers agree to keep their land dedicated for agricultural use as part of this arrangement.
All 50 states utilize some form of differential assessment. While some require enrollment, others apply automatically and to all eligible land. Some even stipulate that newly purchased lands must stay in the program in order to be taxed at reduced rates.
Some states, however, do not impose any requirements or penalties for renewing enrollment or renewal and allow landowners to convert portions of their farmland not currently registered as agricultural parcels into agricultural ones.
Most agricultural land is taxed using use-value assessment. Under this system, an owner’s assessment for agricultural property is determined using its potential earnings from agricultural production. Unfortunately, this system can distort land use by providing incentives that skew towards allocating it efficiently while subsidizing less valuable parcels that could otherwise be put to other uses.
Real estate taxes, by contrast, are calculated according to a parcel’s full market value. Thus, when its value rises it will be assessed at a higher rate than when its value decreases.
Tax policies favoring agricultural land have been adopted across the U.S. in response to pressures associated with rapid urbanization. Although such policies are usually effective at slowing conversion of prime agricultural land for other uses, they have not prevented intensive urban development altogether.
State policymakers, administrators, taxpayers and interest groups regularly debate the appropriate levels and forms of property taxation and public good provision. With regard to agricultural land specifically, several states have reviewed and revised their farmland taxation programs in recent years.
As soon as a landowner opts to convert agricultural land to nonagricultural use, an agricultural assessment will remain in place for eight years or five if located within an agricultural district. Conversions can be defined as any act that changes the use of land from agricultural to nonagricultural use, whether by abandonment, sale to an owner who has not signed an Agreement to Discontinue Use , or permitting it to become vacant and eventually unoccupied.