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.
“Agricultural use” is defined as the production of plants and animals useful to humans, but does not include the management and harvesting of a woodlot.
Limitations and Benefits of Enrollment. When you enroll your parcel into PA116 you must choose a number of years to not develop your property, 10 years being the minimum and 90 years being the maximum. During this time you cannot build a structure on the property unless it consistent with farm operations and can only build a residence if it is for an individual essential to the farm operation. The property owner benefits from this restriction on the land 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.
Transferring Agreements. A landowner must keep in mind that the PA116 program is a contractual agreement that runs with the land. Landowners intending to buy or sell farmland should be aware of any PA116 agreements that are in place. In order for the land to be transferred to a new landowner, the new owner will need to assume the existing PA116 agreement or the PA116 agreement will need to be terminated.
Release of Part or All of an Agreement. A landowner also needs to keep in mind that a PA116 agreement is not easily terminated. 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 two categories are: 1) death or disability of an agreement holder or someone essential to the farm, or 2) a parcel of up to two acres with a structure that predates the 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.
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 specifics.