What is a roll-back tax? What are the implications and how do they affect land owners?
Texas values land exemptions according to the current utilization of the land. Exemption considerations are in place for special use land such as agriculture (ag), timber, recreational, park, or scenic land. The exemptions offered on special use land ease the tax burden for the land owner.
Land is assessed annually and special use land is granted an exemption. The annual taxes on land are based on the market value less the value of any exemptions. A roll-back occurs when the land is found to no longer qualify to claim these types of exemptions. Prior to recent legislation, the assessor had the right to go back a certain number of years from the change in land use and collect taxes on the difference in the change in value, plus interest.
Prior to 2019, if special use land was no longer deemed special use, it could be subjected to the roll-back tax. In essence, if the assessor found that the land was no longer being used as timber or ag, they could go back up to 5 years for roll-back taxes and interest. In 2019, legislation was passed to reduce the number of years from 5 to 3 years in which the roll-back tax could be assessed on a change in special use agriculture and timber land. At the time, this legislation change excluded recreational, park, and scenic land which remained at 5 years.
In 2021, Texas HB3833 was passed which revises the law regarding roll-backs by not allowing interest to be charged when a change in use is determined. After complaints of inconsistency, the new law also allows a 3-year roll-back period for changes to all special use land which includes recreational, park, and scenic land, in addition to agriculture and timber usages. The additional tax resulting from a roll-back is based on the market value of the land for the previous three years. The roll-back tax is calculated as the difference between the amount of tax paid based on the market value less the exemption, and the amount that should have been paid as determined by the change in special use based on the current market value. For instance, when a parcel of land previously assessed as special use ag is no longer utilized as agriculture, a roll-back assessment is triggered. Because of this, it is important to review and, if warranted, appeal the annual market value assessed by the assessor. While the tax may appear to be minimal due to the special use land exemption, a future roll-back could significantly increase the tax liability if the market value is too high.
As a land owner, you have the right to protest the change in value and not be subject to penalty or interest on any resulting roll-back taxes. If you anticipate a change in land use in the near future, talk with one of our real estate professionals who can discuss the potential impact of the land use change and offer strategies for minimizing the resulting roll-back taxes. Whether the value of your special use land is currently fairly assessed, our consultants can discuss the impact of the changes to the roll-back provisions in Texas HB3833 and help avoid any surprises on your future tax bills.