Homeowners who live on agricultural acreage that meets a minimum size standard may qualify for a significant property tax break. Rules vary from state to state, and there can be stiff penalties if you run afoul of them. Here’s how the “ag exemption” works and how you could benefit from it.
Agricultural land is valued differently
The agricultural property tax exemption values land based on its potential for agricultural production rather than its market value. Typically, the agricultural production value is considerably less than a property’s market value. This can result in substantial tax savings for the property owner.
If you live on the property, a small carve-out of land is valued as your homestead and treated like any other residential property for tax purposes.
The states set the rules
Almost every state offers an exemption on the property value of agricultural acreage. Each state sets its own rules, however, and they can even vary county by county.
States typically have requirements such as these for the agricultural exemption:
- The acreage must be at or above a state-set minimum in size, typically five acres.
- The property must be used to raise agricultural products such as cattle, sheep, goats, bees, poultry, exotic birds, alpacas or plants such as cotton that produce fiber. Commercial fish farming also qualifies.
- There is a minimum number of acres on which you can raise livestock, typically 10. You can raise bees, which are considered a type of livestock, if you have enough acres for the ag exemption but not enough to raise cattle, sheep, and/or goats.
Some states also offer an ag exemption if you use your land for “wildlife management.” This can include having birdhouses designed for certain species of migratory birds or other accommodations for different wildlife the state wants to see preserved. An exemption is offered in some states for growing timber used in commercial wood production.
How much is the tax savings?
Property subject to the agricultural exemption qualifies for substantial property tax savings. For example, a tract of land with a $100,000 market value might be taxed at $1,000. If the same property is subject to the ag exemption, its taxes could be less than $100. Consult your county tax appraisal district to get specific numbers on how the ag exemption would affect your property.
Staying in compliance
The penalty for falling out of compliance with the exemption is stiff. If you fall out of compliance and the exemption is revoked, the taxing authority will bill you for the difference in taxes between what you would have paid on a market valuation basis compared to an agricultural valuation for a certain number of past years, often five. (The number of years may vary from state to state.) In addition, you may be charged a penalty of five to seven percent for each year. The agricultural exemption can only be reclaimed when the property has been back in compliance for a certain number of years, such as three of the last five.