Michigan’s Qualified Agricultural Property Exemption

10 million acres of agricultural land in Michigan contain 56,000 farms which produce $5.7 billion in products annually. These farms and other lands eligible for favorable treatment under certain legislation can take advantage of real property tax relief and transfer emptions under the General Property Tax Act, MCL 211.1 et seq. and Farmland and Open Space Preservation Act, MCL 324.36101 et seq. Under the General Property Tax Act Section 211.7ee, agricultural land is entitled to the Qualified Agricultural Property Exemption. The Qualified Agricultural Property Exemption exempts certain defined property from the State 18 mill school operating millage. As an example, Holly Township in Oakland County levies a total of about 56 mills including the State school operating millage. On a property with a taxable value of $200,000.00 the property tax bill is about $11,200.00. But if the Qualified Agricultural Exemption is used, the real property taxes are reduced by 32%, to about $7,600.00.

Additionally, the sale of Qualified Agricultural Property is not a “transfer of ownership” or an uncapping event that reassesses the property. In most other instances when real property in Michigan is sold, the sale triggers a so called uncapping event and the taxable value, which is usually lower than the State Equalized Value (“SEV”), rises to the SEV thus increasing total property taxes. Transfers of Qualified Agricultural Properties do not uncap provided that: (a) the property remains Qualified Agricultural Property after the transfer, and (b) the new owner files certain forms with the local assessor’s office, and the register of deeds where the property is located after the transfer is made.

For these purposes “Qualified Agricultural Property” is either (a) property that is classified as agricultural, or (b) property that is not classified as agricultural, but which nonetheless uses more than 50% of its acreage for agricultural uses. The definition allows for some interesting alternative scenarios. For example, in theory, a property may be classified or zoned as residential, but be eligible for the exemption if more than 50% of the acreage is used for agricultural purposes regardless of the zoning classification or, if a property is classified by zoning as agricultural, the owner can still qualify for the exemption even if none of the property is used for agricultural purposes.

Additionally, aside from the exemption from the 18 mill state education millage, owners of properties enrolled in the Farm Land and Open Space Preservation tax credit program can receive a credit against income taxes due the State of Michigan (not a mere deduction against income). Under this system, the landowner receives a tax credit on property taxes in excess of 3.5% of the landowner’s income. The Michigan Department of Agriculture gives the following example, “if the owner has an income of $20,000 and property taxes on the farm total $2,000, he/she would subtract $700 (3.5 percent of $20,000) from the $2,000 property tax for an income tax credit of $1,300.” At some point, the landowner’s income will be too large to take advantage of the credit (i.e., the value of the credit declines as income rises).

There are further benefits associated with the Farmland Preservation Act Credit program: properties enrolled in this program are also exempt from future (not current) special assessments for water, sewer and some drainage projects, though road improvement levies still apply. While the exemptions from special assessments are subject to recapture if the property is sold (or the farmland contract is released prior to the expiration date of the agreement), the amount of the recapture cannot exceed the amount the assessment would have been at the time of the exemption and does not include any interest or penalty. Also, if the land is sold and it is not used for agricultural purposes (i.e. developed), then there is a recapture of part of the actual income tax credit (usually the past 7 years’ credits).

In any of these instances there are a number of fact-specific scenarios which require deeper analysis. Improved parcels, especially those with a functioning house or related commercial operation, may only partially qualify for the Qualified Agricultural Exemption and the local unit of government may require satisfactory proof that land not zoned for agricultural use is indeed being farmed before granting the exemption or credit. Additionally, there are other rules that can exempt certain timberlands from the 18 mill state school operating millage under Michigan’s Qualified Forest Program. Finally, keep in mind that these exemption and credit programs are not like conservation easement donations under federal income tax laws, and are not subject to deductions from income for federal income tax purposes.

For these and other reasons, we recommend the services of an attorney, especially if you are negotiating the purchase or sale of agricultural land, considering enrolling land in one of the programs or plan on taking one of these exemptions. Experienced real property lawyers at Giarmarco, Mullins & Horton, P.C. can be reached at (248) 457-7000, or send your inquiry via email to pthursam@gmhlaw.com