Building a home on former farmland can be tricky. For one thing, you need to consider a “recapture tax” you might have to pay.
If the property is subject to a Farmland and Open Space Preservation Agreement, called a PA 116 agreement, the land owner agrees not to develop the land for a while in return for a state tax credit.
When the PA 116 agreement expires, the land owner has to pay back part of the credit. Since farmland is now exempt from the school operating millage and has its taxable value capped, for most farmers this PA 116 credit is gone or substantially lower.
But the recapture tax becomes an even bigger issue over time. The law allows the taxable value of farmland to remain capped following a transfer of ownership. When it ceases to be farmed, a recapture tax is imposed equal to the property taxes saved in the preceding seven years as a result of the continued capping of the taxable value. This tax will be larger the longer the cap has been in place.
Sellers and buyers need to be aware that a buyer who wants to develop the land can unilaterally force the seller to pay the recapture tax by filing a notice with the assessor before closing on the purchase.
Before buying, or selling, agricultural land, you need to consult a real estate law expert or you could get stuck paying the recapture tax.
