Texas agricultural lands: Be aware of rollback taxes

Property tax benefits of agricultural lands

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. The discounted value is based on production and is usually a small fraction of the assessed market value of similar land not designated for agriculture.

A change from agricultural use leads to “rollback taxes”

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.

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 been paid if the land had been taxed on its higher market value.

The property tax code was amended in 2019 to reduce the rollback from 5 years to 3 years, and in 2021 to remove the requirement to pay interest on unpaid, recomputed taxes.

What to know about buying and developing agricultural land

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

• Have an expert calculate the rollback tax prior to acquiring the site. The tax collector will seldom take the time to calculate rollback estimates for portions of a tax parcel, and their estimates are often inaccurate.

• 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 agricultural use designation, a new application must be filed with the 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 use on the remaining 60 acres and continue to be taxed at the agricultural value for this portion.

• 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 average rollback tax.

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