Farmland Development Rights Agreement
By: Danelle E. Harrington
A Farmland Development Rights Agreement (known as “PA116”) is a temporary restriction on the land, where the landowner voluntarily agrees to preserve their land for agricultural use in exchange for certain tax benefits.
How to qualify? In order to qualify your farmland must fall into one of the categories that the State has set. The most common two eligibility categories are: 1) 40 acres or more with at least 51% of the land devoted to agricultural use, or 2) 5 acres or more with at least 51% of the land devoted to agricultural use and that produce an annual income of $200 or more per tillable acre.
Limitations and Benefits of Enrollment. When you enroll your parcel into PA116 you must choose a number of years for the agreement to run, between 10 and 90 years. During this time you cannot build a structure on the property unless it is consistent with farm operations or for an individual essential to the farm operation. The property owner benefits from these restrictions by receiving income tax credits on their Michigan state income tax return. The credit is equal to the amount of property taxes paid on the property minus 3.5% of the landowner’s household income. Another benefit is that the land subject to the PA116 agreement is exempt from special assessments for sanitary sewers, water, lights, or non-farm drainage.
Release of Part or All of an Agreement. A landowner must keep in mind that when property is sold the PA116 agreement either needs to be transferred to the new owner or the property must be removed from the PA116 program. In order for a landowner to remove all or part of a property from the PA116 program the property must fall into one of several categories. The most common categories are: 1) death or disability of an agreement holder or someone essential to the farm, 2) a parcel of up to two acres with a structure that predates the agreement, or 3) expiration of the term of an agreement. When you remove a parcel from the PA116 program you are required to pay back the last 7 years of property tax credits plus 6% interest (exempt from interest if due to death or disability). The calculated pay-back amount becomes a lien on the property until it is paid.
Recent Changes. In 2016, Michigan changed its existing PA116 legislation. The changes were, in large part, designed to speed up the timeframe for processing applications, removals, and transfers filed with the Michigan PA116 office. One change that landowners need to be aware of is that when PA116 agreements are created, expire, or are split or transferred, the landowner is now required to record the document with the Register of Deeds. To avoid future problems, it is very important to follow through and record the documents.
In sum, PA116 is a very beneficial tax credit program for landowners. However, a PA116 agreement is a long-term restriction on the land and you should not enter into an agreement without knowing all of the details.
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 this field 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.