The Farm CPA
Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.
Watch Your Real Estate Tax Bill
Apr 05, 2010
I think that most farmers know that the residential and commercial real estate markets have gone through dramatic changes in the last few years. I know that in our area that residential prices peaked out about three years ago and in many of the cities near me the price is at least 50% below the peak.
Many would ask how that might affect you as a farmer. The affect may come when you get your real estate tax bill for this year or next. Most think that if the value of your property increases, then your property tax bill with increase or vice versus. The reality is that it is the change in value of your property versus all other properties that determines your property bill. Most of the taxes that are raised and paid by real estate taxes are of a fixed nature. Therefore, the value of the property is just a mechanism to allocate the total taxes owed.
Lets take an example:
Suppose the county is raising $1,000 in taxes for the year and you have a farm worth $500,000 and your neighbor has a house that is worth $500,000. This means that 50% of the total taxes raised will be allocated to each of you. You are your neighbor will each pay $500. Now lets say that your farm increases in value to $750,000 this year and your neighbor's house drops in value to $250,000. Then your tax bill will go from $500 to $750 and your neighbor's bill will drop to $250.
In many states with large farmland concentrations, this valuation adjustment has already happened or may happen this year. This means that your property tax bill may go up even more than the value of your land has risen. There may not be much you can do about it, but you need to know that it can happen.
Bruce Johnson of the Department of Agricultural Economics from the University of Nebraska has a very good power point presentation on this issue for Nebraska farmers, however, the concepts apply to any farm operation.