Agricultural Property Tax Benefits and Issues

There are two main property tax benefits afforded to agricultural property in Michigan, the Qualified Agricultural Property Exemption and the exemption from uncapping when agricultural property is transferred to a new owner.
The first, the Qualified Agricultural Exemption, is an exemption from the State 18 mill school operating millage. Property qualifies for the agricultural exemption if it is either classified agricultural by the local assessor, or, if 50% or more of the property’s acreage is used for agricultural purposes and the owner files a claim with the local assessor.
The second is the exemption from uncapping when agricultural property is transferred, so long as the new property owners continue to use the property as qualified agricultural property and file an affidavit attesting to that with the Register of Deeds. In most other instances when property is transferred to a new owner it “uncaps” which mean the property is taxed based on the State Equalized Value (SEV) of the property instead of its taxable value (TV). The TV on farmland is usually much lower than the SEV, which, if uncapped, will cause a drastic increase in property taxes.
There are a couple of issues I see when reviewing client’s property taxes relating these two tax benefits. The most common issue with the Qualified Agricultural Exemption are that clients are eligible for the exemption but are not receiving it, which could be for two different reasons. First, a parcel is eligible for the agricultural exemption because over 50% of the acreage is used for agricultural purposes, but is not receiving it. Second, the property is incorrectly classified, such as a building used for agricultural purposes that is classified residential or commercial instead of agricultural. It’s important that a property owner receive the agricultural exemption not only for the exemption from the 18 mill school operating millage, but also so that if there is ever a transfer of ownership the property would be exempt from uncapping.
The most common ussie I see regarding the uncapping exemption is when there is a change in the percentage of the property that is used for agricultural purposes. This most commonly happens when there are non-farm buildings, such as rental houses on the property. In order to qualify for the exemption from uncapping the property must be used for agricultural purposes the same percentage before and after the transfer. So, if a parcel of farmland had a home on it that was used as the farmers principal residence and was therefore receiving a 100% agricultural exemption before the transfer, and then after the transfer the new owner starts using the home as a rental house, it would decrease the percentage of the property that was used for agricultural purposes and cause an uncapping.
One last issue to keep in mind with the uncapping exemption is that if the property ever ceases to be used as agricultural property after an agricultural affidavit has been recorded, the property will uncap and a recapture tax will be assessed. A recapture tax is the re-assessment of the benefit the property owner received by not having the property uncapped for the last 7 years.
Michigan law concerning agricultural property taxes is continuing to evolve. It is imperative to review the particular facts of your property tax situation with a real estate attorney.
Sharon A. Burgess and Danelle E. Harrington practice in the areas of probate/estate planning, long term care planning and elder law, and business and real estate transactions at SMITH BOVILL, P.C. Their articles are intended to introduce various issues arising within these fields of practice and are not intended to replace individual legal advice. If you have questions, please contact Sharon or Danelle at one of the firm’s two convenient office locations in Frankenmuth and Saginaw.