Keeping the Tax Collector at Bay: Making North Carolina's Real Estate Land Use Program Work for You
In 1973, the North Carolina General Assembly enacted the North Carolina Real Estate Land Use Program ("Program") designed to provide property tax relief to owners of forestland and farmland and to dissuade them from selling those lands because of either the reality or the threat of higher taxes resulting from increasing land values driven by other potential uses of the land. Generally, real property is required by North Carolina statute to be valued for tax purposes at its market value based on its "true value in money" ("True Value"). True Value, as used in the statute, is synonymous with the "fair market value" of the property, taking into consideration the "highest and best use" of the property, not its actual use. Under the Program, however, a qualifying property's tax value is assessed based on the owner's actual present use of the property, not its True Value based on other potential uses. A qualifying tract of forestland fronting on a major highway that might fetch a hefty sum on the open market as the location of a potential mall or office complex, will be taxed on its value as a tract of forestland, even though the former, not the latter, might be its highest and best use.
What Land Qualifies for the Land Use Program?
A property owner who thinks the owner's land might qualify for present use valuation must timely file a completed application with the county tax assessor's office within the county's regular property tax listing period. The application must show clearly that the property is presently used for agricultural, forest, or horticultural purposes. However, beyond the threshold issue of the present underlying use of the property, there are four additional requirements that must be met.
Ownership
If agricultural, forest, or horticultural property is owned by an individual, either that individual must reside on the property or the property must have been owned by the individual or a relative throughout the four-year period immediately prior to the filing of the application to enroll the property in the Program. However, the four-year requirement is waived if (a) the property is already enrolled in the Program at the time of the conveyance to the current owner, (b) the new owner continues the qualified use, and (c) the new owner files an application with the county tax assessor within 60 days after the transfer and accepts liability for the deferred taxes.
If potentially qualifying property is owned by an entity such as a corporation or a limited liability company, the entity's principal business as stated in its organizational documents must be the same as the qualifying use of the property, and all owners of the entity must be natural persons actively engaged in the qualifying use. Properties owned by certain trusts also may qualify for the Program.
Acreage
For agricultural property, at least ten acres of a tract must be in actual production. For forestland, at least 20 acres must be in actual production and not otherwise included in agricultural property enrolled in the Program. Property used for horticultural purposes must have at least five acres in active production. Only the portion of a tract in actual production will qualify for present use valuation. The remainder of the tract will be assessed based on its highest and best use.
Owners of multiple tracts of land should be aware of an exception to the minimum acreage requirements: if at least one of the owner's tracts meets the applicable acreage requirements, the owner's smaller tracts also may qualify for enrollment in the Program if they (a) are under the same use, (b) are in the same county or within 50 miles of the qualifying tract if located in another county, and (c) meet all other requirements of the Program. This exception allows an owner whose 20-acre tract of forestland qualifies for the Program to also receive the benefits of the Program for nearby forestland tracts too small to qualify on their own as long as the smaller tracts otherwise comply with the Program's requirements.
Income
This requirement is cut and dried: a qualifying agricultural or horticultural tract must produce an average gross income of $1,000 for each of the three years prior to the property's qualification for the Program. There is no income requirement for forestland.
Sound Management
A tract must be operated pursuant to a "sound management program" in order to qualify for the Program. A sound management program is defined by the North Carolina General Statutes as "a program of production designed to obtain the greatest net return from the land consistent with its conservation and long-term improvement." In other words, all land in the Program must be managed so as to maximize its income potential. Sound management for agricultural and horticultural land may be demonstrated in a variety of ways, including enrollment with a state agency-administered management plan, compliance with recognized best management practices, or certification by an agricultural agency that the land is under sound management. For forestland, an approved forestry management plan is required. Partnering with a knowledgeable local forestry consultant can go a long way toward ensuring that the owner of forestland is taking advantage of all of the benefits of the Program.
A word of caution: county tax assessors are required to audit a portion of the properties enrolled in the Program each year, and that audit may include a field visit. So owners must be careful to keep complete and well-organized records for when the tax man comes calling, and be able to prove that the owner is, in fact, operating the property pursuant to a sound management program.
Benefit of Enrolling in the Program
The benefit of enrolling in the Program is simple: reduced property taxes. Tax savings on property enrolled in the Program can vary from county to county, as county tax assessors are authorized to set their own present use value rates. Regardless, the impact on a property owner's tax liability can be substantial, as property generally is assessed for present use value at 25% to 40% of its True Value. The benefit can be even greater near larger urban areas where there is a wide disparity between the True Value based on the highest and best use (a shopping center near the beltline, for example) and the actual use value (the family farm).
Losing Program Qualification
The qualification for present land use valuation can be lost if circumstances change and the property ceases to meet the statutory requirements. The most common causes of disqualification are the sale of the property or a change in the use of the property to a non-qualifying use. So, if the family farm is sold to the shopping center developer, or if an apple orchard is turned into a driving range, the owner loses the benefit of the Program. However, as stated above, if a property enrolled in the Program is sold and the new owner continues the current qualifying use, then the sale may not result in disqualification.
Upon a property's disqualification, the property owner not only will be taxed for the year in which the disqualification occurs and all subsequent years based on the property's True Value, but also will be required to pay the full amount of the deferred taxes and interest thereon for the previous three tax years. Further, it is the property owner's responsibility to notify the tax assessor when a property ceases to qualify for the Program, and failure to do so may result in an additional 10% penalty.
A parcel also may lose its present use value qualification as a result of a compliance review. Each year, tax assessors are required to review one-eighth of the parcels in their county that are taxed using a present use valuation. If an assessor finds that the use, ownership, or size requirements of a parcel are not met, or that the parcel is not being operated pursuant to a sound management program, the parcel will be disqualified and rollback taxes, interest, and the 10% penalty set out above will be imposed. However, an owner whose property is disqualified by a tax assessor as a result of a compliance review is entitled to appeal the disqualification to the county Board of Equalization and Review.
Other Property Tax Deferment Programs
While agricultural, forest, and horticultural, property has historically comprised the bulk of tax-deferred property in North Carolina, the concept has been expanded in recent years to property used for other, favored, purposes. For example, North Carolina now also provides tax deferment benefits to owners of historic properties and to owners of working waterfronts. Property designated as historic is taxed on the basis of 50% of its True Value and is subject to the three-year rollback of deferred taxes only if there is a change in the ordinance that designated the property as historic or there is a change in the property (other than by fire or other natural disaster) that causes the property to lose its historical significance. A "working waterfront property" is either a parcel containing a pier that extends into coastal fishing waters and limits access to boaters who pay a fee, or a parcel adjacent to coastal fishing waters that is used primarily for a commercial fishing operation or for fish processing. A working waterfront property also must produce an average gross income of at least $1,000 for each of the three years prior to qualification. Working waterfront property is taxed based on its present use value versus its True Value, and also is subject to the three-year tax rollback and the interest penalty.
Conclusion
For as long as there have been taxes, people have looked for ways to avoid paying them. Taking advantage of the present land use valuation programs in North Carolina is an effective and legal way to keep the tax collector at bay. Strict compliance with the requirements of the applicable program can result in significant yearly tax savings to owners of qualifying property.
For further information regarding the issues described above, please contact Clifford P. Parson.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.