What Are Rollback Taxes?

Many land owners do not quite understand the nature of rollback taxes.  To understand rollback taxes, it is important to understand certain exemptions offered by local property taxing authorities, for example, the agricultural exemption (often referred to as the "ag" exemption).  Subject to varying qualification requirements (e.g. minimum land size) of different counties in Texas, a land owner who grows timber, raises cattle, grows a crop, etc., on their land for a certain number of years (e.g. the last 3 years) can file an application with the applicable county to be considered an agricultural producer, entitling the land owner to a significant property tax break.  Often, land owners with such a designation pay 1/4 or less of the property taxes applicable to non-exempt property.  It is also important to understand that an applying land owner need not be in engaged in an agrucultural business to be entitled to such an exemption.  For example, they could simply lease their land to a farmer, timber grower or rancher.

Land that is exempt is subject to a special tax, applicable at the time the use of the land changes.  This is a rollback tax.  Essentially, the rollback tax is the difference between the amount the land owner owed in property taxes and the amount the land owner would have owed had there been no exemption, for each of the five tax years preceding the change in use.  As most can imagine, that can be a very large tax.

The issue of rollback taxes often arises in the context of a purchase or sale of real property.  Take, for example, a property owner who leases 20 acres to a cattle rancher, the property is located on the corner of two major roadways in a rapidly developing area, and the landowner is considering selling the property to a major retail developer.  Who pays the rollback taxes?  Unfortunately, there is no clear answer to this question, as it largely depends on who technically changes the use of the property.  In the above example, if the land owner only removes the cattle and takes down his fence to bring water and sewer to the property to better market it for retail development, does this constitute changing the use?  The answer is "maybe", as it largely depends on the entire set of facts surrounding the land sale and subsequent use.  It is very important to retain competent legal counsel to negotiate provisions in your purchase and sell agreement to clearly allocate the burden of rollback taxes.