Central Appraisal Districts are responsible for determining and applying the taxable value for all properties in their respective counties, but because Texas has a variety of property types, we don’t have a one-size-fits-all appraisal approach.
For example, much of Texas’ land is used for agricultural purposes, and our state allows property owners to have their land appraised based on the land’s capacity to produce agricultural products rather than the land’s market value. This often provides a substantial reduction in the appraised value that is used for ad valorem taxation.
However, the Texas Tax Code allows that when land that has qualified for agricultural appraisal changes use to nonagricultural purpose, the property owner who changes the use will owe a “rollback tax” for each of the previous three years when the land had the lower appraisal (with some exceptions). This “rollback” tax is the difference between the taxes paid on the land’s agricultural value and the taxes that would have been paid if the land had been taxed on its higher market value.
What does this mean for the real estate industry?
This circumstance results in unfair and unjustified ad valorem taxation on property owners.
A significant future tax burden can deter potential property owners from seeking to use their property as they see fit, which violates their private-property rights. When considering the burden of “rollback” tax liability, property owners may be hesitant to reclassify their property from agricultural to another use, which not only places a burden on the owners, but potentially limits community growth.
Texas REALTORS® position
Our association supports repealing or reducing the three-year “rollback” tax collection and any related interest charges imposed when land that has qualified for agricultural appraisal changes use to non-agricultural purpose.
We expect to see legislation addressing this issue as the Texas Legislature continues to focus on reducing property tax burdens statewide.
Texas has two constitutional provisions that value qualified property based on its agricultural use rather than on its market value.
Voters first added agricultural valuation to the Texas Constitution in 1966 as Article VIII, Section 1-d. Property qualified if it was used for agricultural purposes and was owned by a family or individual whose primary occupation was farming or ranching. The primary purpose was to keep land in agricultural use and protect legacy farming. As Texas became increasingly urbanized and ownership shifted from the family farm to other ownership structures, this approach became increasingly ineffective.
In 1978, voters added Article VIII, Section 1-d-1 to the Constitution. This approach focuses entirely on the use of the land and does not consider ownership structure or occupation. This approach is now used for most agricultural valuation in Texas.
The two provisions contained a “rollback” penalty to discourage changes from agricultural use and prevent the holding of property in agricultural classifications simply to avoid paying taxes on market value. The deduction from market value for agricultural use property is estimated at more than $210 billion.
It now appears that the “rollback” penalty has served its purpose and has become counterproductive to development and a limitation preventing needed value additions to taxing unit tax bases.
A law passed in 2019 reduced change-of-use lookback taxes due when a property is changed from agricultural to nonagricultural use, reducing the lookback period from 5 years to 3 years and reducing the interest due from 7% to 5%.