SPECIAL PROPERTY TAX VALUATIONS Self-Study Paper

Transcription

1 SPECIAL PROPERTY TAX VALUATIONS Self-Study Paper John Brusniak, Jr. Tracy M. Turner Ryan Law Firm, L.L.P Dallas Parkway, Suite 300 Dallas, Texas th Annual Robert C. Sneed Texas Land Title Institute December 4-5, 2014 Hyatt Hill Country Resort, San Antonio Chapter 33

2 JOHN BRUSNIAK, JR. Ryan Law Firm, LLP Dallas Parkway, Suite 300 Dallas, Texas FAX: SUMMARY John Brusniak, Jr. John Brusniak, Jr. is a nationally recognized property tax attorney. His ground-breaking appellate successes over the past 30 years and his active involvement with the legislature have significantly influenced Texas property tax law. He is a frequently sought speaker and publisher of property tax articles and texts. John has been recognized by his peers with election to the positions of chair of the Ameri can Bar Association's Property Tax Committee, chair of the State Bar oft exas Property T ax Committee, and chair of the entire State Bar of T exas Section of Taxation. He has repeatedly been selected as one of Texas Super Lawyers and one of The Best Lawyers in America. John is a partner of the property tax specialty law firm of Ryan Law Firm, LLP and is President of the National Association of Property Tax Attorneys, an elite organization of the top property taxpayer attorneys in the United States. Tracy M. Turner Tracy M. Turner is an associate with the Ryan Law Firm, LLP in Dallas, Texas. She specializes in property tax litigation, focusing primarily on commercial property. She provides her clients with exceptional legal representation, while concentrating on the individualized needs of each client. She has developed close relationships with the various Appraisal Districts within the State of Texas and works closely with them to resolve the tax issues for her clients. She is quickly becoming a leader in the field of property tax.

3 TABLE OF CONTENTS I. INTRODUCTION 1 II. AGRICULTURAL AND OPEN SPACE LAND 1 III. TIMBERLAND 4 IV. PARK, SCENIC AND RECREATIONAL LAND 4 V. PUBLIC ACCESS AIRPORTS 5 i

4 I. INTRODUCTION Certain types of properties have been granted special, alternate valuation methodology outside the normal market value standards. These properties are valued based upon their productivity value. Agricultural land, open space land, timber land, park, scenic and recreational use land and public access airport property land are all valued based upon the price they would sell for based upon the revenue they should generate based upon their actual, and not highest and best use. II. AGRICULTURAL AND OPEN SPACE LAND A. Agricultural and Open Space Land Valuations. The Texas Constitution recognizes the importance of agriculture to the state's economy and creates a special, restricted valuation exception to the requirement that all real property be valued at market value. TEX. CONST, art. VIII, l(d) and l(d-l). TEX. TAX CODE ANN. section 23.51(1) and TEXAS PROPERTY TAX CODE et seq. implement these provisions. The provisions of TEXAS PROPERTY TAX CODE are narrow and rigid, providing special agricultural valuation only to natural persons (i.e., human beings) who earn more than half of their annual income from agriculture. Additionally, those individuals are required to file annual applications for exemption with appraisal districts. By contrast, is more liberal. It allows persons, natural as well as legal entities, to qualify for special agricultural valuation. There are no income requirements attached to this provision, and once a person qualifies for valuation under this provision, no reapplication is necessary unless requested by a chief appraiser. This valuation provision is referred to as "open space land" valuation, and valuation under TEXAS PROPERTY TAX CODE is referred to as "agricultural valuation." As a result of the more liberal provisions contained in this provision, virtually all special valuations previously granted under TEXAS PROPERTY TAX CODE have been converted to open space land valuations. To qualify for valuation under 23.51(1), a property must have been involved in agricultural activities for five consecutive years (if the property is located within the boundaries of a municipality) or for five of the last seven years if the property is located outside such boundaries. An exception exists for properties located within municipal boundaries which do not have substantial city services available to them. Those properties may qualify based on their use during five of the preceding seven years. In the five qualifying years, the property must have been principally engaged in agricultural activities. By contrast, in the year of application the property must be engaged in agricultural activity to the level of intensity generally accepted in the area. Reissv. Appraisal Dist. of Williamson County, 735 S.W.2d 633 (Tex. App. Austin 1987, writ denied). This is a higher standard. Taxpayers should obtain information regarding this standard from the Texas Agricultural Extension Service. B. Converting Open Space Land to Wild Life Management. Taxpayers, whose properties have qualified for open space land valuation, may convert their properties' use to wildlife management. Under this provision, activities designed to sustain, breed, and otherwise care for or encourage indigenous wild animals for use by human beings as food, medicine or recreation qualify for this restricted valuation. Typically, such properties once qualified are used for hunting. Ecological laboratories operated by public or private colleges or universities also qualify for such valuation. Nootsie, Ltd. v. Williamson County Appraisal Dist., 925 S.W.2d 659 (Tex. 1996). C. Calculating Productivity Value of Agricultural Land. The productivity value of agricultural land is based upon the land's capacity to produce agricultural products. To determine this value, the average net income the land would have yielded under prudent management from the production of agricultural products during the five prior years is capitalized. After capitalization, if the land is determined to exceed the market value as determined by other generally accepted methods of appraisal, the land must be appraised by applying the other appraisal method. Appurtenances to the land, such as riparian water rights, private roads, dams, reservoirs, water wells, canals, ditches, terraces, and similar reshapings of or additions to the soil for agricultural purposes effect the value of the land and must be considered when appraising the land. When calculating the average net income from the land, a deduction from income must be allowed for an appurtenance subject to depreciation or depletion. TEXAS PROPERTY TAX CODE D. Calculating Productivity Value of Open Space Land. The productivity value of open space land is calculated by each county appraisal district. The chief appraiser is required to segregate the properties 1

5 Special Property Tax Valuations Chanter 33 into the categories of irrigated cropland, dry cropland, improved pasture, native pasture, orchard and waste, and may create additional categories. The chief appraiser is required to subdivide these categories further by soil type, soil capability, irrigation, general topography, geographical factors and other factors which influence the productivity of the land. Once this is done, the chief appraiser creates an income and expense statement, by category and subcategoiy, for what is typical in that county. This results in an "owner-operator" valuation. The result is called "net to land." These calculations are done utilizing either owner-operator budgets or utilizing leases. Calculations are made of the "net to land" for the preceding five years. These numbers are totaled and averaged. The averaging is intended to balance out the fluctuations in yields, weather conditions and costs which occur annually in agriculture. Challenges to these calculations are made by contesting the county-wide assumptions made by the chief appraiser. The chief appraiser is required to make a deduction for any depletion which may occur to underground water resources as a result of the agricultural operations. There are two "lease" methods which are available. Under a "cash lease" method, assumptions are made regarding what the property would bring in if it were leased for agricultural purposes. Expenses are also deducted from this amount. These tend to be minimal since the lessee would be bearing the costs of the agricultural operation. Under a "share lease" method, a property owner will lease property for agricultural purposes but will be compensated on a percentage basis. This calculation is similar to the "owner-operator" calculation. Once the "net to land" is determined, the appraisal district will divide this number by a capitalization rate which will yield a value per acre for the property. That result is applied to the acreage owned by the taxpayer. The capitalization rate is determined from market expectations for return on investment for this type of use. Expert testimony on this point may be required should significant differences of opinion exist between the parties. TEXAS PROPERTY TAX CODE E. Impact of Hunting Income on Open Space Land Calculations. Income derived from hunting and recreational leases is to be utilized in calculating the "net to land." Such income is included with the productivity income for the property. A cumulative number is determined, as opposed to two separate valuations being made and added together. Open space land qualifying under the wildlife management provisions is frequently used for hunting. The chief appraiser is required to calculate such hunting income on a county-wide basis as well and is specifically barred from utilizing actual hunting leases for the property being valued. Specific guidance on these issues is available from the Manual for The Appraisal of Agricultural Land published by the Texas Comptroller of Public Accounts. F. Change of Use from Open Space Land. The right to open space land valuation ends when a taxpayer changes the use of the property to a nonagricultural use or if the taxpayer simply stops all agricultural activities. Resolution Trust Corp. v. Tarrant County Appraisal Dist., 926 S.W.2d 797 (Tex. App.-Fort Worth 1996, no pet.). It is a taxpayer's obligation to inform the chief appraiser when such events occur. Failure to do so triggers a ten percent penalty on the differential between the open space land value and the market value for each tax year which was incorrectly taxed. This penalty is in addition to the rollback tax penalty. It is the responsibility of the chief appraiser to determine that a change of use has occurr ed and the date on which the change occurred. Compass Bankv. Bent Creek Investments, Inc., 52 S.W.3d 419 (Tex. App. Fort Worth 2001, no pet.). The party triggering a change of use is responsible for paying the rollback tax. This is particularly critical when a property qualifying for open space land valuation is transferred. If a change of use occurs prior to, or contemporaneously with, the transfer of title, the transferor is responsible for payment of the rollback tax. If it occurs afterwards, the transferee is responsible. It is importantto draft contractual documents to reflect the parties intentions regarding the rollback tax and the tax for the year of transfer, which tax will go to market value, if the change of use occurs in the year of transfer. If a chief appraiser incorrectly determines the date of a change of use, a taxpayer may challenge that determination to the appraisal review board. If a taxpayer fails to challenge a change of use determination to the appraisal review board within 30 days ofthe mailing ofthe notification, the determination is final and binding. TEXAS PROPERTY TAX CODE G. Exceptions to the Change of Use Rule. Eight statutory exceptions and one judicial exception to the change of use tax rollback mandate are recognized. The seven statutory exceptions are: (1) a transfer or sale for purposes of creating a right of way; (2) a taking by the government by eminent domain; (3) a transfer or sale of property to a governmental entity for a public purpose; (4) a transfer from the government to a private party for economic development in certain economically 2

6 distressed areas; (5) a transfer in certain lightly populated counties for purposes of human burial; (6) a transfer to qualified religious organizations, provided that the organization converts the property to a qualified religious use within five years of the date of transfer; (7) a transfer to certain charitable organizations, provided that they convert the property to a multi-tiered retirement community providing services without regard to the beneficiaries' ability to pay or providing annually at least four percent of its net patient revenue in charitable care to its patients, and (8) transfers to schools. In addition to those exceptions, the courts have recognized that a change of use may not be triggered when the cause of the change is governmental interference with the agricultural use of the property. Dallas Cent. Appraisal Dist. v. Seven Inv. Co., 813 S.W.2d 197 (Tex. App. Dallas 1991) rev'd on other grounds 835 S.W.2d 75 (Tex. 1992). TEXAS PROPERTY TAX CODE H. Penalty for Removal of Land from Open Space Use. Because preservation of open space land is an important state policy, the Texas legislature has crafted a severe penalty to discourage removal of property from agricultural use. Properties receiving open space land valuation carry both a taxable value, based on what the land would sell for based on its agricultural productivity and a market value reflecting what the land would sell for based on open market conditions Once a change of use is determined, a tax bill is sent back assessing the property for the five years previous to the tax year in which the change of use occurred, for the differential between the market value and productivity value. The tax rates in effect for those years are utilized, and simple interest at the rate of seven percent per annum is applied. If a property did not qualify for open space land value in one of the rollback years and taxes were paid during that year on a market basis, that year is_omitted from rollback taxation. Additionally, if the State of Texas owned the property during any of the base years, those years are also omitted from the rollback calculation. Additionally, the valuation for the current year is taken from its open space land valuation to a market valuation, regardless of what date in the year the change of use occurs. The penalty, or rollback, is a supplemental assessment, and the current year tax is a current assessment even if a supplemental or corrected bill is sent. Taxes on the rollback are due on the next January 31 st which provides the taxpayer with at least 20 days to pay the tax from the date of mailing. In other words, if a rollback tax bill is mailed on January 20!h, the bill would not be required to be paid before January 31 s1 of the following year. The revised tax bill pertaining to the current year's taxes is due by the later of January 31, or the first day of the next month which provides the taxpayer with a minimum of 21 days to pay, calculated from the date of mailing of the tax bill The tax lien to secure the collection of this tax attaches to the property automatically on the date the change of use occurs notwithstanding the fact that the determination of change of use will not be made until some time later. TEXAS PROPERTY TAX CODE I. Penalty for Removal of Land from Agricultural Use. The Texas legislature also crafted a severe penalty for property owners who remove their property from agricultural use. Just like the open space valuations, agricultural use valuations carry both a taxable value and a market value. If a property owner sells or changes the property to a nonagricultural use, a tax lien for the difference between the agricultural value and market value is attached to the land on the date the sale or change took place. The additional taxes are imposed on the three years preceding the year in which the sale or change took place. The chief appraiser must send the property owner a notice of determination as soon as the determination has been made that the property sold or there has been a change in use. A tax bill is sent back assessing the property for the property for the three years prior to the year in which the property sold or the use of the property changed. The taxes and interest are due by January 31 st, or the first day of the next month which provides that taxpayer with a minimum of 21 days to pay. TEXAS PROPERTY TAX CODE J. Market Valuations Mav Not Be Challenged at Time of Rollback. It is imperative for owners of land qualifying for open space valuation to monitor and challenge the market valuations for their properties carefully during each tax year in which they are made. Once a tax rollback notice is issued, it is too late to challenge the prior years' market valuations under either the normal appeals process or the late remedies set forth in TEXAS PROPERTY TAX CODE Tarrant Appraisal Dist. v. Gateway Ctr. Associates, Ltd., 34 S.W.3d 712 (Tex. App. Fort Worth 2000, no pet.)', Anderton v. Rockwall Cent. Appraisal Dist., 26 S.W.3d 539 (Tex. App. Dallas 2000, pet. denied). Taxpayers accustomed to paying minimal tax sums on their productivity value may get lulled into a false sense of security. 3

7 III. TIMBER LAND A. Timber Land Valuations. Taxpayers whose land is, and has been, principally devoted to the production of timber or forest products for five of the preceding seven years, may file an application with the appraisal district to qualify for a special valuation. The land must be currently and actively devoted to the production of timber or forest products to the degree of intensity generally accepted in the area with the intent to produce income. Once a property qualifies, no reapplication is necessary unless requested by a chief appraiser. TEXAS PROPERTY TAX CODE & B. Appraisal of Qualified Timber Land. The value of the timber land is determined by the category the property is placed in. The categories are based upon soil type, soil capability general topography, weather, location, and other pertinent factors as determined by governmental sources. Depending on the category of land the value is then determined by using accepted income capitalization methods applied to average net to land. "Net to land" refers to the aver age net income that would have been earned by a category of land over the preceding five years by a person using ordinary prudence in managing the land and the timber produced on the land. The capitalization rate used is the greater of (1) the interest rate specified by the Farm Credit Bank of Texas or its successor on December 31 of the preceding year plus 2 14 percentage points; or (2) the capitalization rate used in determining the appraised value of qualified timber land as provided by Subchapter E of the TEXAS PROPERTY TAX CODE for the preceding year. The chief appraiser must also determine the market value of the land. The appraised value may not exceed the market value. However, the taxable value of the timber land may not be less than the appraised value of that land for the taxing unit in the 197B tax year. If the appraised value of the timber land is found to be less than the taxing unit's appraised value from 1978, the taxing unit must use the 1978 appraised value. TEXAS PROPERTY TAX CODE 23.71; and C. Change of Use from Timber Land. If the use of the timber land changes, an additional tax is imposed. The additional tax is equal to the difference between the taxes imposed on the land for each of the five years prior to the year the change took place and the tax that would have been imposed had the land been valued at market value for each of those years, plus interest at an annual rate of 7%. A tax lien is placed on the land on the date the change of use occurs. If the change of use only applied to a portion of the timber land, then the additional tax only applies to the portion where to the change of use occurred. The chief appraiser has the authority to make the determination as to whether a change in use has occurred. If a chief appraiser determines that a change in use has occurred, he must send a notice to the property owner. The property has a right to protest the chief appraiser's determination. The additional tax does not apply to a change in use that is a result of: (1) a sale for right of way; (2) a condemnation; (3) a transfer of the land to the State of Texas or a political subdivision of the State of Texas to be used for a public purpose. Also, the additional tax does not apply if the timber land was changed to qualify for land designated for agricultural use, open-space land, or restricted-use timber land. The additional tax also does not apply to land owned by a religious organization under TEXAS PROPERTY TAX CODE if the organization converts the land the land to a qualifying use under within five years. Lastly, the additional tax does not apply to a change in use if: (1) the land is located in an unincorporated area of a county with a population less than 100,000; (2) the land is not more than five acres; (3) the land is owned by a non-profit cemetery organization; (4) the cemetery organization dedicates the land for a cemetery purpose; (5) the cemetery organization has not dedicated more than five acres of land in the county for a cemetery purpose in the five years preceding the date the cemetery organization dedicated the land for a cemetery purpose; and (6) the land is adjacent to a cemetery that has been in existence for more than 100 years. TEXAS PROPERTY TAX CODE IV. PARK, SCENIC AND RECREATIONAL LAND A. Park. Scenic and Recreational Land. Taxpayers owning five or more acres may significantly reduce the taxability of their property by recording in the county deed records a voluntary restriction limiting the use of their property to park, scenic and recreational use. Under the terms of such restriction, the taxpayer may utilize the property for individual or group sporting activities, park or camping activities, the development of historical, archaeological or scientific sites, or for the preservation and conservation of scenic areas. The taxpayer must own the property in fee simple and restrict the use of the property to those activities for a minimum of ten years. 4

8 In addition, the property must be operated in a manner so as not to result in the accrual of distributable profits or other private gain, the property must have been used for the restricted purpose in the prior year, and the taxpayer must intend to continue the use in the current year. Private uses such as country club golf courses are permitted under this special form of restricted appraisal. Tarrant Appraisal Dist. v. Colonial Country Club, 767 S.W.2d 230 (Tex. App.~ Fort Worth 1989, writ ref'd n.r.e.). The lack of accessibility by the general public does not impede the granting of this special valuation. To qualify for this valuation, a taxpayer must file a sworn, written application with the chief appraiser on or before April 30 of the year for which special valuation is sought. Once granted, annual reapplications are not required. TEXAS PROPERTY TAX CODE and B. Valuing Park. Scenic and Recreational Land. In valuing property restricted to park, scenic and recreational use, the chief appraiser must utilize comparable sales of similarly restricted properties. Additionally, the chief appraiser may not utilize any data which does not recognize the restricted nature of the property. Typically, this results in property being valued on a basis comparable to flood plain property. Such valuations are extremely low in light of their limited use. TEXAS PROPERTY TAX CODE C. Penalty for Removing Property from Park. Scenic and Recreational Use. TEXAS PROPERTY TAX CODE grants the county attorney or any person having an interest in the property the right to sue to enforce the provisions of the restriction. Additionally, should a taxpayer violate the provisions of the restriction by diverting the property to another use, the chief appraiser is to institute rollback tax proceedings. Once a change of use is ultimately determined, a tax bill is sent back assessing the property for the five years previous to the tax year in which the violation occurred, for the differential between the market value and restricted value. The tax rates in effect for those years are utilized, and simple interest at the rate of seven percent per annum is applied. Taxes on the rollback are due on the next January 31 st which provides the taxpayer with at least ten days to pay the tax from the date of mailing. Addit ionally, the valuation for the current year is taken from its restricted valuation to a market valuation, regardless of what date in the year the change of use occurs. No sanctions apply if the change of use occurs as a result of a sale for right of way or a taking by eminent domain. TEXAS PROPERTY TAX CODE V. PUBLIC ACCESS AIRPORTS A. Public Access Airport Property. Public Access Airport Property is privately owned airport property that is regularly used by the public or regularly provides services to the public. Taxpayers owning at least five acres, in fee simple, may reduce the taxability of their property by filing a deed with the county clerk of the county in which the airport property is located. The recorded instrument must describe the property and the restricted part of the property, name each owner, and state that the restricted property may only be used as public access airport property during the term of the deed restrictions. The term of the deed restriction must be at least 10 years. Once a property qualifies for restricted use, no reapplication is necessary during the term of the deed restriction, unless requested by a chief appraiser. TEXAS PROPERTY TAX CODE and B. Valuing Public Access Airport Property. When a property owner imposes a deed restriction on property, the market value is affected. When an appraiser is valuing property restricted as public access airport property, he may not consider any factor other than those relating to the value of the airport property, as restricted. Further, the appraiser cannot use comparable sales of properties that are not similarly restricted. Valuing deed restricted property is similar to valuing other types of properties. The most common methods of appraisal, market data approach, cost approach and income approach, are used. The standard method used for deed restricted property is market value. In addition to the three common appraisal methods, certain circumstances arise with deed restricted prope rty and alternative methods are used. The most common scenario is when the restriction is about to expire or can be voluntarily removed in the near future. Because a buyer might pay more for the property because the restricted use of the property is about to expire, the procedure used to value the property is referred to as the valuation of a reversionary interest. This method is appropriate when the market value of the property is higher than the current use value, as restricted, or the value of the reversion to a nonrestricted use. Using this method, the current value of a reversion is estimated by proj ecting the future value for which the property would sell, without a restriction, and discounting the value to its present value based upon an appropriate discount rate. 5

9 TEXAS PROPERTY TAX CODE 23.93; Guidelines for the Valuation of Public Access Airport Property, published by the Texas Comptroller of Public Accounts. C. Change of Use from Public Acess Airport. The right to restricted land valuation ends when the property is no longer subject to a deed restriction. When this happens, an additional tax is imposed on the property. The additional tax, or rollback tax, is equal to the difference between the taxes imposed on the property for the preceding 5 years and that tax that would have been imposed had the property not been restricted to use as a public access airport. A tax lien for this additional tax attaches to the property on the date that the property is no longer subject to a deed restriction. The taxes become delinquent, and start incurring penalties and interest, if they are not paid by the due date, or 10 days after the tax statement is delivered. TEXAS PROPERTY TAX CODE D. Penalty for Violating Deed Restrictions. The Texas Legislature crafted a penalty for taxpayers who violate the deed restrictions. The penalty imposed is equal to the difference between the value of the property assessed as public access airport property and the market value of the property had it not been restricted to use as a public access airport. The penalty is imposed the year the violation occurs. The chief appraiser must send the taxpayer notice of the penalty along with an explanation of the taxpayer's right to protest. The penalty is collected at the same time and in the same manner as the taxes on the property. If the penalty is not paid on time, penalties and interest accrue, just like with any delinquent tax. TEXAS PROPERTY TAX CODE