Texas land designated for agricultural use and property tax rollback

Protecting and optimizing this valuable designation

Effective June 15, 2021, H.B. 3833 amended Section 23.55 of the Texas Property Tax Code to remove interest of 5% per annum in the calculation of rollback taxes.

As the robust Dallas Fort Worth industrial market continues to grow, developers are expanding their search for land opportunities to surrounding areas. The pursuit for available land leads them to neighboring counties including Denton, Kaufman, Rockwall, Johnson, and Ellis. Many of the available sites are designated for agricultural use with eventual agricultural rollback taxes due.

Agricultural use designation

The agricultural use designation was created to provide a discounted land value to calculate property taxes while the land is being used for agricultural purposes. Land qualifies for the designation if it has been used for agricultural purposes for 5 of the previous 7 years. Typical qualifying uses include ranching, farming, or timber production.

Agricultural rollback tax

Per Section 23.55 of the Texas Property Tax Code, if the land previously qualified for agricultural appraisal and is changed to a non-agricultural use, a rollback tax is due for each of the previous three years in which the land received the lower appraisal.

Effective Sept. 1, 2019 a provision in the Property Tax Code changed the rollback period for property taken out of agricultural valuation from 5 years to 3 years. It also reduced the interest due on the unpaid recomputed taxes from 7% to 5%.

The appraisal district maintains two separate values on the tax roll. There is both a market value and a lower agricultural value based on agricultural production. The rollback tax is the difference between the taxes paid on the land’s agricultural value and the taxes that would have paid if the land had been taxed on its higher market value.

Purchasing qualified agricultural use land for future development

A few important considerations when acquiring agricultural land for future development:

• Have an expert calculate the rollback tax prior to acquiring the site. While the local tax collector will sometimes assist with the rollback estimate, we have numerous experiences where the tax collector did not provide the correct amount. The tax collector will seldom take the time to calculate rollback estimates for portions of a tax parcel.

• Maintain the agricultural use designation. This is typically achieved by continuing the lease with the current operator.

• Upon a change of ownership, if the new owner wishes to maintain the ag use designation, a new application for agricultural use must be filed with their local appraisal district. The filing deadline is April 30th.

• A portion of the agricultural use designation can be preserved if the property is developed in phases. For example, if an owner is developing 30 acres of a 90-acre parcel, they can maintain the agricultural exemption on the remaining 60 acres and benefit from the lower appraised value.

• Continue to monitor and appeal the underlying market value with the appraisal district while the property is still in agricultural use. The annual market value will eventually be used to calculate the 3-year ag rollback tax.

Learn more about our state and local tax consulting services

Want to be notified of our new and relevant CRE content, articles and events?