What is the Intent of the Agricultural Use
Assessment Law?
Maryland
law provides that lands which are actively devoted to farm or agricultural use
shall be assessed according to that use. In 1960 Maryland became the first
state to adopt an agricultural use assessment law which has proved to be a key
factor in helping to preserve the State's agricultural land.
The
agricultural use assessment law and its corresponding programs are administered
by the Department of Assessments and Taxation. This State agency is responsible
for assessing all real property throughout the State and has offices located in
the county seat of each of the 23 counties and in Baltimore City. Procedures
governing the agricultural use assessment have been established to achieve
uniformity among the 23 counties in which agricultural property is located. The
Department recognizes the importance of this program to the individual land
owner and to the farming community in the State.
The Tax-Property Article of the Annotated Code of Maryland, Section
8-209, provides:
- The General Assembly declares that it is in the general public interest of the State to foster and encourage farming activities to:
- maintain a readily available source of food and dairy products close to the
metropolitan areas of the State;
- encourage the preservation of open space as an amenity necessary for human welfare
and happiness; and
- prevent the forced conversion of open space land to more intensive uses because
of the economic pressures caused by the assessment of the land at rates or
levels incompatible with its practical use for farming.
- It is the intention of the
General Assembly that the assessment of farmland:
- be maintained at levels compatible with the continued use of the land for
farming; and
- not be affected adversely by neighboring land uses of a more intensive nature.
While these provisions establish the overall philosophy for the agricultural
use assessment program, the law also includes:
- Specific provisions relating to the criteria to be used in determining whether or
not lands qualify for the agricultural use assessment.
- Tests to be considered by the
assessors.
- Situations where the use
assessment cannot apply
- Application of the agricultural
use assessment to woodland.
What the Agricultural Use Assessment Means to
the Property Owner?
Although its importance is widely recognized, the actual
benefits of the agricultural use assessment are often misunderstood. Because
certain risks in the form of potential tax penalties can result from receiving
the agricultural use assessment, the property owner should carefully evaluate
the actual tax savings against those risks. The following is an outline of one
method to determine the actual tax savings that might be realized from the agricultural
assessment.
First, it is necessary to understand that a property tax bill is
the product of the assessment on the real property multiplied by the property
tax rate. This is true for all property tax situations, regardless of whether
or not the land receives the agricultural use assessment. Property tax rates
are expressed as a certain number of dollars and cents per $100 of assessment.
While some cities and towns in Maryland impose a separate property tax rate for
property in that jurisdiction, most agricultural land is not found within those
boundaries. Thus, for illustration purposes, only the county and state property
tax rates will be considered here. Our example will use a typical county rate
of $1.00 per $100 of assessment and a state rate of $.112 per $100 of
assessment resulting in a combined rate of $1.12.
To determine what tax savings can be realized by receiving the
agricultural use assessment, an examination of the level of assessment with and
without the use assessment must be made. The actual preferential value of $500
per acre is assigned to acreage within the agricultural use assessment. Land
that does not receive the agricultural use assessment will be assessed based on
its market value.
Assume that a 100 acre parcel of land has a market value of
$3,000 per acre. The total value of the parcel would be $300,000 (100 x
$3,000). The same 100 acre parcel receiving the agricultural use assessment
based on a value of $500 per acre would be $50,000 (100 x $500). The taxes
using a combined tax rate of $1.112 per $100 of assessment would be $556.00
[($50,000 ÷ 100) x $1.112] under the agricultural use assessment and $3,336.00
[($300,000 ÷ 100) x $1.112] under the market value assessment – a difference of
$2,780.00. This illustration demonstrates the importance of the agricultural
use assessment in terms of its tax savings.
What Criteria Are Used to Qualify Land to
Receive the Use Assessment?
It must be emphasized that the assessment applies to the land,
not to the property owner. The law directs the Department to determine whether
or not the land is "actively used" for farm or agricultural purposes
and defines "actively used" as "land that is actually and
primarily used for a continuing farm or agricultural use." The Department
does not concern itself with who owns the land or the income of the property
owner (with one minor exception mentioned later). The Department's sole focus
is on the nature and the extent of the use of the land.
The primary test used by the Department is directly related to
the phrase "actively used”. While the Department has formal regulations
and procedures that are used in this determination (Code of Maryland
Regulations [COMAR] Title 18 and Maryland Assessment Procedures Manual) which
are available to the public, they can be summarized as follows:
- The nature of the agricultural activity on the parcel that is subject to the
approved agricultural activities defined in COMAR Title 18.
- The amount of “actually devoted land” engaged in an approved agricultural activity.
- The primary use of the land located on the parcel, non-agricultural v/s agricultural.
- Total size of the parcel and its ratio of “associated land” to “actually
devoted land” used in the approved agricultural activity.
- Amount and type of livestock or poultry located on the “actively used land”.
- Acreage in participation in a
governmental or private agricultural program such as Conservation Reserve Enhancement Program (CREP).
- A parcel that is less than 20 acres that is contiguous to a parcel owned
by an immediate family member qualified for agricultural use may be eligible as
a “Family Farm Unit”.
- Agricultural activity
required on the parcel
- Parcels being combined as an “Agricultural Land Unit” (ALU) for the purpose of
qualifying for the agricultural use.
- Not more than 3 parcels of land that are each less than 20 acres in size;
located in the same county and under the same ownership. (Parcels less than 3
acres in size must be adjoining to land owned by the same owner and no more
than 2 parcels under same ownership within the state may qualify.)
- Gross income test derived from the agricultural activity on the parcel of land.
1. A parcel of land or ALU that is less than 20 acres but greater than or
equal to 5 acres may be eligible to meet the gross income test of $2,500 when
the extent of agricultural activity is difficult to determine.
2.
The $2,500 gross income test must be applied when at least 3 acres but less
than 5 acres of land are actually devoted in an approved agricultural activity.
3.
Should the Department elect to apply the $2,500 gross income test, it is
important that the property owner understand what is required. First, the term
"gross income" means gross revenues derived from the agricultural
activity only. It excludes other sources of income to the property owner.
Hence, the figure to be reported is the total gross revenues received from the
agricultural product before subtracting expenses.
4.
The law provides that "...'average gross income' means the average of
the 2 highest years of gross income during a 3 year period." This
provision was added to recognize special situations such as a drought.
5.
The law provides that the Department may require the property owner to
supply evidence of the gross income in the form of copies of sales receipts,
invoices, lease agreements, schedule F in tax filing, or other documents. If,
the property owner leases the land to a farmer, the rent paid for the land is
not considered under the gross income test. Instead, the Department examines
the nature of the agricultural activity and determines whether or not that
activity would generate an average gross income of $2,500 if the revenues from
the sale of the product were received by the owner of the land. A similar
approach is taken when the land owner actually does the farming, but does not
sell the products.
What Are Some of the Restrictions on Receiving
the Use Assessment?
The law is specific regarding those instances when the
agricultural use assessment cannot be granted. For example, regardless of the
agricultural activity, the land used for a homesite on the farm is not
eligible. This principle applies to tenant homesites as well as the primary
homesite. Unless obviously larger in size, the homesite is generally deemed to
be a minimum of one (1) acre. Whatever the size, the homesite is valued and
assessed at its market value as is all other non-agricultural land used in a
more intensive use on the parcel.
Another important restriction is land zoned to a more intensive
use at the request of the owner or a person who had previously had an ownership
interest in the land. If a rezoning occurs at the initiative of the county, the
land may retain the agricultural use assessment. If the owner requests the
rezoning, the use assessment must be removed.
The law also prevents
granting the use assessment to relatively small parcels of land. For example,
in the case of farmland, no parcel under three (3) acres in size is eligible
unless one of the following conditions are met:
- the land is owned by an owner of adjoining land that is qualified to receive
the agricultural use assessment and the land is actively used (limited to only
two parcels of less than 3 acres in the State and the parcel must have
agricultural activity); or
- the owner receives at least 51% of the owner's gross income from the active
use of the small parcel; or
- the parcel of less than 3 acres is a part of a "family farm unit."
This term means that the owner of a larger farm may separate out of that larger
parcel not more than 1 smaller parcel for each immediate family member. These
smaller parcels must remain in active agricultural use, they must be contiguous
to the larger parcel, and they must be owned by the immediate family member.
(parcel must have agricultural activity)
The final restriction relates to platted subdivision lots. An ownership is
only eligible to receive the agricultural use valuation on a maximum of 5
parcels that are less than 10 acres in size within the same county. In
addition, no more than 2 parcels less than 3 acres under the same ownership in
the State may qualify for agricultural use.
These parcels must meet the definition of "actively used”. Any number of
parcels in the subdivision plat over the maximum of 5 which are under 10 acres
in size will be assessed based on the market value.
What Woodland is Eligible to Receive the
Agricultural Use Assessment?
The application of the agricultural use assessment to woodland
is an important tool in helping to preserve Maryland's forestland. In general
terms, there are two categories where woodland may be eligible for agricultural
assessment: (1) woodland associated with a farm; (2) tracts of woodland within
an approved forest plan. When the woodland acreage is a part of a larger parcel
that is determined to be actively used for agricultural purposes, the woodland
portion of that acreage may receive the agricultural use assessment when the
parcel’s total acreage meets ratio requirements for that region for land that
is actively used. In this case, it is generally expected that the primary use
of the parcel is for an agricultural activity. If the Department determines
that only a small portion of the parcel of land is actually devoted toward the approved
agricultural use activity, the use assessment may be denied.
Woodland tracks of land are
also eligible for the agricultural use assessment upon the property owner
obtaining a forest management plan as long as certain criteria have been
met. Tax property Article
§8-209(h)(1)(v) states that parcels of woodland less than 5 acres excluding the
homesite are not eligible for the ag assessment. The parcel is required to have a minimum of
5 acres of land within the forest management plan. Parcels of land may not be
combined to obtain the 5 acre minimum size requirement. The management plan
must be prepared by a professional registered forester and the property owner
will be required at certain points in time to submit their compliance with the
plan to the Department. The management plan may be one provided by the State
Department of Natural Resources pursuant to the Forest Conservation Management Agreement; or a forest stewardship plan recognized by the Maryland Department of
Natural Resources developed by a registered forester. Land within a Forest
Conservation Management Agreement receives an agricultural land rate of $125.00
per acre and land within a forest stewardship plan receives an agricultural
land rate of $187.50 per acre.
More information about the forest management programs may be found by
visiting the Maryland Department of Natural Resources' website. Regional brochures about the forest service are also provided by
selecting one of the following regions: Western, Southern, Central,
or Eastern.
CAUTION!
Owners should be mindful that lands being assessed in the Agricultural Use
Category could be subject to an Agricultural Transfer Tax at some later date in
the event of a transfer, sale, or other action leading to or causing a
violation of the agreement as contained in any Letter of Intent that may have
been filed in order to receive the Agricultural Use Assessment.
More detailed information concerning the Agricultural Transfer Tax is available in a separate pamphlet.
