Rollback Taxes - Selling Your Texas Ag-Exempt Land
Your Texas land has been benefiting from an agricultural appraisal – often called an "ag exemption" – which has likely saved you a good amount on property taxes over the years. That's great! But now you're thinking about selling. What happens to that ag exemption when the property changes hands?
This is a critical question because, depending on the type of exemption you have and what the buyer does, selling could lead to unexpected extra taxes called rollback taxes.
This guide focuses on the rules as they apply to sellers, mainly covering the common 1-d-1 Open-Space appraisal, but also highlighting a crucial difference with the older 1-d Ag-Use appraisal.
Quick Recap: Why Does the Ag Exemption Matter?
Remember, the ag exemption isn't a true "exemption" but a special valuation. Instead of being taxed on its full market value (what it might sell for), your land is valued based on its ability to produce agricultural products (like crops or livestock) – its productivity value. Since this value is usually much lower, your tax bill is lower. Texas created this to support agriculture and preserve open land.
Will Selling Trigger Rollback Taxes?
This is usually the biggest concern for sellers. Here’s the breakdown, and it depends entirely on which type of appraisal your land has:
- If You Have 1-d-1 Open-Space Appraisal (Most Common):
- Good news! Simply selling the land generally does NOT trigger rollback taxes.
- The trigger for 1-d-1 rollback is a change in how the land is used. If the buyer stops using the land for agriculture and develops it (builds houses, starts a non-ag business, etc.), they will likely be responsible for the rollback taxes.
- Seller Responsibility: You should be upfront with potential buyers about the land's current 1-d-1 status and the potential for rollback taxes if they change the use.
- If You Have the Older 1-d Ag-Use Appraisal (Less Common):
- Selling the land DOES trigger rollback taxes under the 1-d rules, regardless of what the buyer plans to do.
- The 1-d rules are much stricter and tie the appraisal more closely to the individual owner's occupation and income from agriculture. The sale itself breaks that qualification.
- Action Step: If you have 1-d appraisal, you absolutely need to factor the upcoming rollback tax into your selling calculations and negotiations.
How Do You Know Which Appraisal You Have? Check your past property tax bills or contact your county appraisal district (CAD). It's vital to know which rules apply to your land.
What Exactly is the Rollback Tax?
If rollback is triggered (either by sale under 1-d or change of use under 1-d-1), here's what it means:
- Recaptured Taxes: It's the difference between the property taxes paid under the lower agricultural value and the taxes that would have been paid if the land had been taxed at its higher market value.
- Look-Back Period: The calculation goes back for the three years prior to the year the triggering event (sale for 1-d, change of use for 1-d-1) occurred. (Note: This was five years previously, but the law changed).
Who Pays the Rollback Tax?
Can we negotiate who pays? Yes, it's a negotiable part of the property sale. Commonly, the party who causes the change in land use that triggers the rollback tax is responsible.
What does the standard Texas Real Estate Commission (TREC) contract say? The TREC Unimproved Property Contract and Farm and Ranch Contract have specific language:
- When does the buyer pay? The buyer is responsible for any rollback taxes, penalties, or interest assessed after the sale closes if it's due to the buyer's change in how the property is used.
- When does the seller pay? The seller is responsible if the rollback taxes, penalties, or interest are assessed because of the seller's use or change in use of the property before the sale closes.
Refer to ‘PRORATIONS AND ROLLBACK TAXES’ in the contract for the exact language. See our complete guide to the TREC contract to learn more.
How Does the Ag Exemption Affect Your Sale?
- Marketing Advantage: The potential for lower property taxes can be a significant selling point for buyers who intend to continue the agricultural use (farming, ranching, wildlife management). It lowers their future holding costs.
- Disclosure is Key: You should disclose that the land is currently under agricultural appraisal and explain the potential for rollback taxes. Transparency prevents disputes later.
- Valuation: While the tax value is low, your selling price should still reflect the land's fair market value. The ag appraisal affects taxes, not necessarily the sale price between buyer and seller (though potential rollback might be a negotiation point).
Practical Steps Before You Sell
- Confirm Your Exemption Type: Is it 1-d-1 (Open-Space) or 1-d (Ag-Use)? This is the most crucial step. Check with your CAD.
- Understand Rollback Implications: Know if selling itself triggers rollback (1-d) or if it depends on the buyer's actions (1-d-1).
- Gather Information: Have details about your current agricultural use and intensity handy for potential buyers.
- Disclose Fully: Clearly state the ag appraisal status and rollback potential in marketing materials and disclosures.
- Prepare to Negotiate: Decide how you want to handle potential rollback tax liability (especially if you have 1-d land) in the sales contract.
Selling Texas land with an agricultural appraisal is common, but going into it informed about the rules, especially regarding rollback taxes, makes for a much smoother transaction. Knowing your specific situation (1-d vs. 1-d-1) and communicating clearly with buyers are the keys to success.
Disclaimer: This information is for general guidance only, based on the Texas Tax Code and Comptroller's Manual as of October 2024. Tax laws can change. This is not legal or tax advice. Consult with your county appraisal district, a qualified real estate professional, and/or an attorney for advice specific to your property and situation.
