What is the rollback tax in Texas, and who pays it?

• A lot of Texas land is taxed on its capacity to produce, not on market value. People call it "the ag exemption," though technically it's a special valuation.
• If the land leaves agricultural use, rollback is due: the tax difference for each of the previous three years with that valuation.
• The owner who changes the use owes it, as the Texas Comptroller explains.
• In a sale, TREC's land contract splits it: if the sale or the buyer's use after closing causes it, it's the buyer's; if the seller's use before closing caused it, it's the seller's.
• Depending on the land's category, interest may apply. Your county appraisal district can tell you which.

In Texas, certain farm and ranch land is appraised for taxes based on its capacity to produce agricultural products, not on what it would bring on the open market. That productivity value is almost always lower than market value, so the tax is lower too.

The point is to support people actually working the land. So when the land stops being used that way, say a subdivision, a business or a home goes in that leaves no room for the qualifying use, the state recaptures part of the difference from prior years. That's rollback.

Here's what that means for you: if you buy land with an ag valuation, the seller's tax bill today can look nothing like yours if you change the use. And there may be a bill for prior years on top of that.

1. The land has a special valuation. The county appraisal district account shows two values: market and productivity. If both appear, there's a special valuation.
2. A change of use happens. The land stops being used for crops, livestock or whatever use qualified it. The Comptroller explains that the owner who changes the use owes the rollback.
3. The appraisal district calculates it. For each of the previous three years with the special valuation, it compares the tax on productivity value with the tax on market value.
4. Interest is added, if it applies. That depends on the land's category. A 2021 law removed interest for some categories while others still carry it.
5. The bill arrives. It's paid like any property tax; if it goes delinquent, normal delinquency charges apply.

If the land also sits outside city limits in a city's ETJ, there are other rules worth checking at the same time. I cover them in what the ETJ is in Texas.

Three misunderstandings are worth clearing up before anyone talks numbers.

• It isn't a penalty for selling. What triggers it is the change of use, and the contract decides who carries it.
• It isn't your annual tax bill. The yearly bill still comes separately. Rollback is a one-time charge for prior years, due when the use changes.
• It isn't the homestead exemption. Homestead applies to the home you live in. An ag valuation applies to how the land is used. They are separate things with separate rules, and each shows up separately on the appraisal district account. If the land comes with a house, ask what applies to each part.

This is the question people ask most. TREC's standard contracts for unimproved property and for farm and ranch property include a rollback paragraph. In plain terms:

• If the sale, or the buyer's use of the land after closing, results in taxes, penalties or interest for periods before closing, the buyer pays them.
• If the assessment comes from the seller's use or change of use before closing, the seller pays it.
• That obligation survives closing. Signing doesn't make it go away.

That's what the form says. The parties can negotiate something else, but it has to be in writing and clear. A seller might, for example, agree to a price adjustment when the buyer plans to build and knows rollback is coming.

If your plan is to buy land to build a home or a business, this gets discussed before the offer. To review your situation, book 30 minutes with me here.

• Budgeting off the seller's tax bill. Their bill reflects the special valuation. If you change the use, yours will be different. See the tax bill on the listing won't be yours.
• Assuming the "exemption" transfers by itself. That used to be the common assumption. Today, ask the appraisal district what you need to file, and by when, if you want to keep the agricultural use.
• Skipping the contract's rollback paragraph. It's short, and it decides who pays. Read it before you sign.
• Splitting the land without accounting for rollback. If you sell or build on part of it, ask how that affects the valuation on the rest.
• Not requesting prior-year values. Without each year's market and productivity values, nobody can estimate rollback seriously.

Picture a business owner living in Allen who wants to buy a few acres in Collin County, build a home and, later, a warehouse for the business.

The land has an ag valuation; the seller runs cattle on it. The appraisal district account shows both market and productivity values. The buyer doesn't plan to keep livestock, so once she builds and the land leaves agricultural use, rollback for the prior years will come due.

Knowing that before the offer, she requests each year's values from the district, her accountant estimates the impact, and the offer accounts for that cost. The contract states, through TREC's paragraph, that rollback from her change of use is hers, and nobody is surprised after closing.

That's an illustration, not a real client. But that's how land with an ag valuation gets bought without surprises.

• The county appraisal district account: market value, productivity value and the type of special valuation.
• Each prior year's values, to estimate rollback.
• What you'd need to file as the new owner to keep the special valuation, if you plan to continue the agricultural use.
• The rollback paragraph in the TREC contract you'll sign.
• Your plan for the land: building, splitting, running a business. Each can change the use.
• If you're also selling your home to buy the land, the dates on both sides: sell and buy.
• If you own a business, what to sort out first: own a business and want a bigger home.

This isn't tax advice. Your accountant and title company confirm your situation.

What is the rollback tax in Texas?

It's the tax due when land that had a special agricultural-use valuation stops being used that way. It covers the difference between the tax paid on the productivity value and the tax that would have been paid on market value, for each of the previous three years with that valuation.

Who pays the rollback tax, the seller or the buyer?

The Texas Comptroller explains that the owner who changes the use owes it. In TREC's land contracts, if the assessment results from the sale or from the buyer's use after closing, it's the buyer's; if the seller's use before closing caused it, it's the seller's. The parties can agree otherwise, in writing.

Does buying land with an ag valuation trigger rollback?

What triggers rollback is leaving agricultural use. If you plan to keep that use, ask the county appraisal district what you must file as the new owner, and by when, to keep the special valuation.

Does the rollback tax include interest?

It depends on the land's valuation category. The Comptroller explains that a 2021 law removed interest for certain categories while others still carry it. Your county appraisal district can tell you which applies to your land.

How do I find out what the rollback would be on a property?

The county appraisal district has each year's market value and productivity value. The difference is what drives the calculation. Request those values before you sign, and have your accountant or title company confirm your situation.

If you're thinking about buying or selling land with an agricultural valuation, let's go over the documents and your plan before anything gets signed. Let's talk for 30 minutes about your situation, not houses: veronicayeary.com/en/book.

Call or text 469-441-8890 · veronica@veronicayeary.com

Veronica Yeary, Realtor®, CRS · ABR · SRS · CIPS, All City Real Estate DFW.