Property Tax Perspectives: From Buyer to SellerBy Craig Bowen, Broker
Property taxes aren’t fun. They are, however, important and different depending on where one is in the landowner journey. In fact, there are three distinct “experiences” you can have with Texas property taxes given the phase of your landownership. A person will have a vastly different property tax experience depending on whether one is buying, currently owns, or is imminently selling his or her land.
What are Open Space Valuations?
You need a basic understanding of the relevant bits of Texas property tax code before owning land here. Texas property taxes are notoriously high (“but we don’t have a state income tax”), and about 95% of Texas is privately owned. Since Texas’ economy is historically agricultural, the tax code reflects certain benefits for landowners. Chiefly, Texas and many other states have a special designation for agricultural land; these designations, exemptions, and “valuations,” as Texas calls them, bear immediate and long-term financial advantages for the landowner. Referred to as 1-d-1 Open Space Agricultural Valuations, named for their location in the Texas Constitution, these designations include timber, agriculture, and wildlife, and the property will qualify if it is “devoted principally” to these respective uses. For example, Tax Code Section 23.521 and Comptroller Rules 9.2001-9.2005 allow for the management of native wildlife as an agricultural use so long as the owner is practicing three of seven specific ways to propagate a sustaining breeding, migrating, or wintering population of indigenous wild animals for human use. Similarly, if a rancher has the appropriate number of Angus yearlings to meet the minimum grazing intensity requirements set by the appraisal district, they “qualify” for the agricultural valuation.
How do these valuations help the landowner?
Most tracts over twenty acres in Texas have some special use valuation like ag or wildlife. If a property does not have an ag valuation, it takes up to five years of use and some amount of paperwork to obtain any of the special use valuations. In Texas, the county appraisal district establishes an appraised value for individual properties based on a “blanket” price per acre for raw land in given counties or within areas of a county.
The property taxes are equal to the tax rate multiplied by the appraised value so that a $1 million property taxed at a 2% rate incurs a $20,000 tax bill. The agricultural valuation lessens this burden on landowners by instead using a “productivity value” of the property instead of the appraised “fair market value,” or the amount the property is worth in a purchase on the open market. The productivity value is derived from local agricultural trends, but might be something like $10,000 for that same $1 million property. The tax rate does not change, so the property taxes equal the $10,000 productivity value multiplied by a 2% tax rate, or $200. This $19,800 savings theoretically goes into the landowner’s pocket, and thus the local economy benefits from not only the beef or wine grapes or songbirds the landowner is producing on her property, but also her slightly higher profit margin given the mitigated tax bill. To somewhat complicate things, there is an exit penalty – rollback taxes are assessed if a landowner under an ag or wildlife valuation decides to “change the use” of his property. This change in use is usually related to full-scale residential or commercial development, and the appraisal district assesses five years of the difference between the fair market value tax assessment and the ag assessment, essentially forcing the landowner to pay five years in back taxes…with interest, no less.
Buyers need to look at property taxes cautiously. The rural land real estate market in Texas is less sophisticated than the residential market, and misinformation exists everywhere. If a property is advertised as “ag exempt,” it’s a good idea to check the county appraisal district website, anyway. There are expensive long-term consequences to purchasing a Texas property not in ag or wildlife. Buyers are concerned with deadlines during the contract phase of their real estate purchase, but it does not stop there. April 30th is the filing deadline for Texas property taxes. If a buyer closes on his property on April 29th, he needs to be prepared to file paperwork with the county appraisal district to change the property and, thus, the ag valuation into his name the following day. Conversely, if a buyer closes on June 2nd, she theoretically has until the following April 30th to conduct the same filing. Most appraisal districts allow for fee-based late filings until around May 15th. The appraisal district will send a prorated tax bill sometime in the last quarter.
By this time, the buyer understands how the seller currently manages the property taxes – in ag with beef production or in wildlife management managing for native white-tailed deer, for example – and should have a plan to continue the past use or change within the special use valuations. If the buyer does not wish to run cattle but likes the idea of having cattle on the property, she can lease the grazing rights to a local rancher and keep up the ag valuation this way into perpetuity. The wildlife management valuation is an excellent solution for conservation-minded landowners who do not want to deal with livestock or tenants and is becoming the most popular way for non-ag land buyers to obtain a special use valuation.
Once a buyer has settled on realistic long-term property use and property tax management strategy, she needs to set herself up for success. For instance, managing for native chickadees and bluebirds on 40 acres in Williamson County is a realistic long-term strategy that will succeed. The tax code allows for these native target species on that size property under the wildlife management valuation, and the management activities – realistic examples would be implementing nest boxes for supplemental shelter, feeders for supplemental food, fire ant treatment for predator control, and a biannual bird survey for census – are relatively inexpensive and not physically demanding. This landowner needs to research where to purchase her ten nest boxes and feeder, buy her preferred fire ant treatment, and schedule bird surveys with her local birder group or Plateau Land & Wildlife. She must conduct her activities and document them in case the appraisal district asks for a report. It is fair to say managing property taxes in this way is a bit of work – however, the savings are almost always worth the effort. The main goal of the landowner in this phase is to make an incontrovertible effort in obtaining and keeping up with whatever special-use valuation is in place.
If a landowner decides it is best to sell the property, the process is a simple one for the seller. He needs to make sure he pays his proration of the taxes for that year at closing; the special use valuations do not transfer to other properties, and the benefits end with the sale.
The Texas property tax code has many favorable regulations for modern landowners. A good tax strategy is just as important to a ranch as a good road system. Understanding special use valuations can help today’s landowners better manage their property while saving tax dollars.
If you are considering buying or selling land, Plateau Land Group can assist. Contact us at (512) 829-5287 or click Request More Info at the top of this page.