Farming and Other Property Tax Breaks May Net Good Yields for Your Houston Estate Plan

People who own as little as three acres and engage in agricultural practices such as hay harvesting, bee keeping, chicken raising, and designating land for grazing animals may find themselves rewarded by localities with an enormous discount of up to 95 percent on property taxes. This tax break — available in all states except Michigan — has made for some surprising members of the nation’s farming community. Consider Malcolm S. Forbes Jr., Jon Bon Jovi, and former New Jersey Gov. Christie Whitman, among many other famous business folk, celebrities, and politicians with a sideline in farming.

While most tax breaks for landowners occur in a single year, according to a recent Barron’s article, property-tax discounts awarded for agricultural activities are “reaped” annually, just like soy beans, corn, and alfalfa. Barron’s talks about these land tax breaks and more in an article titled “A Harvest of Land-Related Tax Breaks.”

Taxpayers using their land to grow timber can find benefits beyond the property-tax break:  Timberland is great for wealth preservation. Even when land values or the demand for timber tails off, the trees on your farm continue to grow. Experts say that timber growth can provide an annual return of roughly 2 percent to 6 percent a year, and once you sell your timber, your profits are taxed as capital-gains, instead of higher income tax rates. It’s only when you manufacture products like pulp or poles from your timber crop that income tax will apply.

Consider a conservation easement as another vehicle from which to generate a substantial income tax deduction. How does this work? A conservation easement is a portion of land earmarked as off-limits to development, so you would see an income tax deduction equal to the value of the land assigned to the easement when it was created. The estate planning benefits are also worth noting: this easement depresses the value of the property, so when it’s subject to estate taxes in the future, this will be at a lower value. The property’s value will also be reduced when you sell. Be sure to consult with an experienced estate planning attorney about these scenarios.

If your Houston estate plan includes on passing your land to future generations, you might be able to discount the value of your property for gift and estate tax calculations, but you need to start the property transfer process during your lifetime. Again, your attorney can help you.

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Reference: Barron's (February 28, 2015) “A Harvest of Land-Related Tax Breaks”