Agricultural Land Classification Anti-Abuse Provisions Target Farm and Ranch Tax Breaks
Rooted in a constitutionally protected legacy of providing substantial tax benefits to "agricultural land," the Colorado Legislature recently targeted what it views as abusive practices by owners of ranch and farm land who take advantage of the favorable taxation regime applicable to agricultural lands. A state task force evaluated the perceived abuses and the policies underlying the original intent of encouraging agricultural activities, and made recommended changes--ostensibly to make the tax laws more equitable.
The result was the adoption by the General Assembly of House Bill 11-1146, which becomes effective January 1, 2012. Although assessors typically revalue property every two years, and 2012 is not a regular revaluation year, assessors statewide will reclassify agricultural land after the law goes into effect.
Colorado Constitution Art. X, Section 3 establishes the basis for preferential treatment of agricultural land and has been enabled by the adoption of C.R.S. §39-1-101 et seq. Agricultural land is defined as land that was used for the previous two years (and is presently being used) as a "farm" or "ranch," and must have been eligible for classification or actually classified as agricultural land for the prior 10 years. A "farm" is defined as land used to produce agricultural products for profit that originate from the land's productivity. A "ranch" is defined as land used for grazing livestock which are used for food, breeding, draft or profit. There are other categories of agricultural land beyond the scope of this article, including "forest land," parcels subject to conservation easements, and farm or ranch land that has associated decreed water rights. Boarding horses or keeping horses does not qualify, although breeding horses does qualify. Agricultural land can be located either in incorporated or unincorporated areas. Many homeowners, rather than conducting the agricultural use themselves, will lease the land and thereby qualify for preferential tax treatment.
Frequently referred to as the agricultural "exemption," the status is not actually an exemption, but rather a classification category and taxable formula that results in a drastically reduced tax. Homeowners with property that has been classified for real property taxation purposes as "agricultural land" do not pay property taxes based upon a market or cost approach to valuation, but rather on a complex formula based on the earning or productive capacity of the land, resulting in a substantially reduced tax that can be at times 5% or 10% of the tax that would be payable if the land were classified as residential. For example, in Pitkin County, a former working ranch was subdivided and the lots were valued for property tax purposes at approximately $26,000, but the lots actually sold for as much as $1,000,000. The local Pitkin County assessor estimates that approximately 116 properties will be reclassified in 2012.
While traditional agricultural activities such as growing hay and grazing cattle qualify for agricultural land classification, abuses have been perceived to exist where the agricultural activities are more in the nature of a hobby and incidental to the principal residential use of the property. This is particularly the case in the Western slope of Colorado near resort communities where market values of properties can be astronomical in relation to agricultural lands located far from the resorts. As a result, some counties have adopted a policy of requiring a developer to waive the right to agricultural classification for new projects by recording a covenant in order to gain county approval.
Under the new legislation, a county assessor may reclassify a house or similar improvements, together with two acres or less of the land on which the residential improvements are located, as "residential land," unless the improvements are "integral to an agricultural operation" conducted on the land. Thus, the actual real property tax would have two components, one based upon the portion of the land classified as agricultural and the other based upon the portion of the land classified as residential, thereby resulting in a substantial tax increase.
The phrase "integral to an agricultural operation" is defined by the new legislation to mean residential improvements where "an individual occupying the residential improvement either regularly conducts, supervises, or administers material aspects of the agricultural operation or is the spouse or parent, grandparent, sibling or child of the individual." C.R.S. §39-1-102(1.6)(a)(I)(B) (2012).
As a result, the determination of the agricultural or residential classification will be fact and circumstance specific, and given the nuances of the existing statute and the existing case law, every owner who receives a reclassification notice needs to consult with his, her or its legal counsel to decide whether to protest the classification, pay the tax and seek an abatement, or potentially challenge the constitutionality of the statute.
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Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and the Firm.© 2011 Sherman & Howard L.L.C. November 3, 2011