Do I need to seperate the ag from the house when buying the property to minimize my taxes?

Question

I am likely to make an offer on a farm property with a home to raise my kids and ideally hold on to it for my kids and their kids... My inituition is that tax savings over that long of a period is significant so I want to do this right.

Current tax roles on the property basically the value of the ag land is ~50K & taxes on the ag land are only ~$20. The house is currently valued at approx $150K and taxed at approximately $3K...

Comps in the area of current sales and all listings show that ag land is really worth at least $225K and the house (with its acre) is at most $175K...

The listing is just for the house with the acerage and we think we can get it for ~$400K or less...
I am likely to make an offer on a farm property with a home to raise my kids and ideally hold on to it for my kids and their kids... My intuition is that tax savings over that long of a period is significant so I want to do this right.

Current tax roles on the property basically say the market value of the ag land is ~50K & taxes on the ag land are less than $20. The house is currently valued on the tax roles at approx $135K and taxed at approximately $3K...

Comps in the area of current sales and all listings show that the ag land is really worth at least $225-$250K and the house (with its acre) is between $150-$175K...

The listing is just for the house with the acreage as a single item and we think we can get it for ~$400K or less..

I think that technically the land is two roughly equal size lots (one with the house and one not) that have been worked as a single farm and taxed together for well over a decade.

The realtor is thinking that I could likely get the home and the half lot to appraise for most of the purchase price and do a conventional loan to cover most of the entire deal and basically get the other half lot for free or pay some cash...

I am concerned that the combined market value on the tax roles is currently only $200K and once I buy it it becomes recorded at $400K and they may decide to try to keep the land at 50K and stiff me by saying that my home is now worth $350K and more than double the taxes to $6-7K.

Do I need to structure my offer to somehow make it clear that I am paying, for example, $250K for the ag land & $150K for the house?

If I do any financing, to minimize the long term taxes, do I really need to do an ag loan for the land side and a conventional home loan for the house (and make sure the home loan/valueation are kept low)?

The Real Estate Attorney in the area I was going to talk to about this had a sudden death and had to reschedule and I really don't want to delay my offer for fear that someone else will buy it (multiple people have been also checking it out).

Does is matter how I offer and pay for it?

Any thoughts as to what I should do?

Account Closed · Answer

My suggestion is that you do not take tax advice from your real estate agent. If you don't know how farm taxes work, go down to the county assessor's office and ask him to explain it to you. A farm in my area is "in farm deferal". The land is taxed at its agricultural value and the house is taxed at its fair market value. It wouldn't make a drop of difference how you paid for it or even how much you paid for it. The assessor values it according to his schedule of values for that type of agricultural land. Also, if the farm is ever taken out of agricultural use, all the deferred taxes then become due.

Bill Gulley · Answer

Hi, I think you Realtor is right. If your house appraises with the lions share of the total with, say no more than five acres, it can go in the secondary market if comps have similar land area. So, the lot and the house should go as the deal. If you purchase another type of property in that contract, it should have a stated value agreed to. This will make underwriting the deal easier and the appraiser/lender can just exclude the additional land. Doing this seprately requires tow deeds and make sure the lender does not take both for collateral, as they usually will if they can. Even better, I'd do a seprate deal on the land and pay cash and I'd have the closing agent make me a deal for closing that at the same time. I don't know how you assessor uses sales, they don't get a copy of the contract but they can see the deeds, so make sure the deed does not recite the sale price if that is allowed in your state, for ten dollars and other good and valuable consideration is commonly recited where I am. Assessments are diferent from place to place. Some places require that you use the property for an ag purpose to keep that basis. I got 40 acres and alloweed the seller to keep hoofed animals on site past the required period to qualify the property for the next assessment. In some places, if you don't carry on ag activities, it may revert to another category for taxation. Depending on zoning, if that is lost, you may not be able to regain that status, especially if you're in a built up area. Before you buy, a quick call to the assessors office won't hurt, find out the rules, before the contract, you don't have a sale price if they ask, but you can bring up these issues and they will tell you what the rules are. Bill.

Tod R. · Answer

Michael, Another thing to consider is that I was told by one bank that they would not lend me $ on property that is adjacent to my homestead. They felt that I could include that adjacent land as an part of my homestead in a bankruptcy. I found another bank that did the loan and they never brought it up. I never pursued this but you may want to ask your attorney if this is something to consider. I suppose if you closed the entire tract under one loan, you wouldn't have any issues. Just a thought.

Jon Klaus · Answer

Michael, I concur with those who have said the valuation forms are voluntary in TX. Send them in if they support your position (price paid substantially lower than tax assessed). Otherwise, drop them in the circular file under your desk.

Tod R. · Answer

Hi Michael, Bill's explanation is right on the mark for Texas. Once you purchase the property you must reapply for an ag exemption, I believe by April of the following year. As I understand, it must be a minimum of 10 acres and actively involved in qualified agricultural use. Should it ever be removed from the ag exemption, the appraisal district will "rollback" the ag exemption and you will be taxed on the exempted value for the last five years, plus interest (even if you did not own the property for the entire five years). As long as you have the ag exemption in place, you will eliminate any rollback tax for the number of years you've owned the property in excess of five years. As soon as you close, go talk to the appraisal district's land guy about what he needs to see in order to keep it in ag. I did this for some property in Tarrant County and TCAD was very helpful. Good luck!

Just Don · Answer

No matter how you buy it, the tax assessor will do as he pleases. Thats our area anyway. here ag land gets a lower value compared to houses or commercial property. Legally 'here' again they have to raise ALL of similiar property(at once),,,they cant pick and choose which to and which not.

Michael W. · Answer

Just an observation, I am very glad that Texas doesn't have Nebraska's detailed sales recording rules nor Colorado's water restrictions (discussed in another forum thread) as that would be even more things to worry about... Tod, Good point regarding the homestead... My thoughts are that it could be a double edge sword & it is sad that we have to think about all of these things/angles. For example, I remember when I was a kid that one of our cows got out on the road and a kid on a motorcycle hit it and his parents sued us. At first my dad was pretty worried because of our little farm house they may cause us to lose our home and everything. We eventually were able to prove that someone cut our fence and stole one of our horses (letting the cow out) and the kid did not have proper license/registration/insurance & was speeding. I think our lawyer beat them up pretty good and they had no answers as to why he was going so fast near our fence (per the skid marks) & whether he was involved with cutting our fence. In the end I believe they settled for minimal medical bills before any rulings. From that I think my dad incorporated/separated the farm and also structured our main business differently (one corp own the building/plant, one corp find/hire the people, & one corp to be responsible to run the operations & lease the location/plant & contract the people). I spoke with my sister and a few other farm owners and we came up with a few options to discuss with our Real Estate Attorney & Attorney: -1) Do them together as a homestead and have an LLC lease the farmland and do the operations for crops & run the animals. -2) Do the land & home totally separate, with an LLC owning/operating the farm. -3) Do the land & home totally separate, with an LLC owning/operating the farm contracting any ranch hands/help from a third LLC. I suspect the first option gives a single property and homestead option to defend it (if need be) and may have similar protections to the other options. My second option has more paperwork with officially dividing the land and recording deeds, etc & may make the farm land un-homestead-able (that may not be a word). The third option may be way overkill for the size/scope of the farm I have planned (at least in my generation)...I spent the weekend touring a $3M plus horse operation and likely it would be more suitable for something like that...

Just Don · Answer

Just a matter of fact. In Nebraska if the confidential statement isnt attached to the deed at recording NO recording till it is.. price of each parcel of property better be filled in and accurate or they take your first born,,or your life,,,whichever comes first!!

Michael W. · Answer

Thanks everyone. Feeling much better... I have already spoke with the Ag Exemption folk and confirmed the minimal Animal Units & per the recommendation I am also getting the financial records... I just wasn't comfortable asking him if I had to turn in those forms and whether he or someone was going to try to screw me... As part of the process I am getting all of the reciepts for the last 10 years and the ag ledger and I am buying with cash at a little under market price at least enough of the current Animial Units (plus a few extra) to keep the exemption. Still a little stressful but that worry about tax legacy for my family is much better. I still do plan to meet with that Real Estate Attourney when he gets back from grieving about maybe doing a quick-claim deed of the ag side to one of my LLCs to protect the homestead from a lawsuit (or what ever he recommends). At least I don't have to worry so much about any financing being a particular way (big thanks!).

Michael W. · Answer

Thanks guys. Your replies are consistent with what a few other farm owners have said. Part of what was scaring me was that I have purchased some more conventional lots in that same County and the Assessor's office had sent me these forms to fill out indicating purchase price, etc and I thought that automatically adjusted/reset the baseline of the particular property that was purchased. Multiple people have told me since then that those forms are voluntary and I don't need to disclose to them if/or how I financed and such.