As part of the state's 1999-2001 biennial budget, a few controversial changes were made to the use-value program, which assesses farmland based upon its use for agricultural purposes rather than its fair market value. The objective of the use-value law is to allow farmers to continue farming their land without being forced to sell it due to increased taxes. Because communities, in theory, will have to increase property taxes on non-agricultural land to make up for the loss in revenue that would have been generated by taxing farmland at its fair market value, the use-value assessment system represents a tax subsidy to owners of agricultural land or a tax shift to owners of non-agricultural land.
To make sure that the tax subsidy will be used to keep the land in agricultural production, a penalty was created as a means to discourage land speculation and recoup some of the subsidy paid by owners of non-agricultural property. Under the penalty, any person who changes the use of the land to a non-agricultural use will be assessed a penalty equal to the difference between the property taxes that would have been levied on the land if the land had been assessed at fair market value and the property taxes levied on the land for the last two years that the land had been valued under the use-value system. Because this penalty can be substantial and have an impact on someone's decision to purchase the land or the price they are willing to pay for it, sellers are required to disclose to prospective buyers that the land is assessed under the use-value system.
From a policy perspective, the penalty presents an interesting dilemma for the WRA. On one hand, the penalty increases the costs, so it serves as a deterrent to new development by increasing the costs of land acquisition. On the other hand, it seeks to lessen the tax burden on other property owners who are essentially paying a subsidy to farmers to keep the land in agricultural production. As evidenced by competing policies, the penalty provision has huge political ramifications due to its impacts on farmers, developers, local units of government, school districts, environmental groups, and property owners.
As part of the state's budget repair bill, signed into law by Governor McCallum, some changes were made to Wisconsin's use value law that will impact REALTORS® and their clients.
The changes include new disclosure requirements for sellers of agricultural land. Under prior law, sellers were required to disclose only whether the land was assessed under the use value law (Wis. Stat. Sec. 70.32(2r)). Now, sellers of agricultural land are required to notify buyers of ALL the following:
- that the land has been assessed as agricultural land under Wis. Stat. sec. 70.32(2r);
- whether the seller has been assessed a penalty related to the land per Wis. Stat. § 74.485(2); and
- whether the seller has been granted a deferral related to the land under Wis. Stat. § 74.485(4).
Although not specifically required by the use value law, sellers and REALTORS® should also disclose that a subsequent change of use by a buyer may result in penalty under the law, given that such a penalty would likely be considered a material adverse fact. The WRA is in the process of updating its forms to reflect these changes. In the interim, REALTORS® should include the necessary disclosures in the real estate condition report, offer to purchase or other forms related to the transaction.
Definition of "Agricultural Land" Clarified
The definition of "agricultural land," for purposes of use value, is clarified to exclude the land with farm buildings located on it. Therefore, the land under farm buildings, such as barns and silos, are valued at fair market value, rather than use value. Although the Department of Revenue has always interpreted the term "agricultural land" in this manner, the statutes did not specifically address land with farm buildings located on it.
Penalty for Converting Agricultural Land
One of the most significant changes to the law is the manner in which the use value penalty is calculated. A penalty is assessed any time agricultural land is converted to another use, including residential, commercial, or any other non-agricultural use that is not specifically exempted by statute. A change in zoning does not necessarily mean that the property is no longer being farmed. A piece of land may be zoned commercial or residential, but still used for active farm production. While the statutes do not define when a "change of use" occurs, local assessors are given the authority to make this determination.
The penalty is calculated based upon the number of acres converted, multiplied by the difference between the average fair market value of an acre of agricultural land sold in the county the year before the person converts the land (as determined by the Wisconsin Department of Revenue, see below), and the average equalized value of an acre of agricultural land in the county in the year before the person converts the land (as determined by the Wisconsin Department of Revenue, see below), multiplied by the following:
5 percent, if the converted land is more than 30 acres;
7.5 percent, if the converted land is 30 acres or less, but at least 10 acres;
10 percent, if the converted land is less than 10 acres.
In other words:
(# of acres converted) x (average fair market value per acre in county in the year prior to the conversion - average use value of agricultural land in county in the year prior to the conversion) x (5%, 7.5%. or 10%, depending upon the # of acres converted).
Under prior law, the formula for calculating the use value penalty was more complicated, causing great confusion for buyers, sellers, and REALTORS®. Fair market value was determined by the local assessor, who often used the sales price of non-agricultural land (i.e., commercial and residential) to come up with the value. As you can imagine, this lead to some extremely high penalties. In Madison, for example, some developers were assessed more than $200,000 in penalties under the old formula. Furthermore, some assessors didn't keep track of the fair market values of agricultural land and thus couldn't provide this information to property owners or prospective buyers who wanted to know the penalty amount before purchasing the land or making the conversion.
Determining Use Value and Fair Market Value
The Wisconsin Department of Revenue will be calculating both the use value and fair market value of agricultural land for purposes of calculating penalties under the use value law. The Department of Revenue will calculate the average fair market value of an acre of agricultural land on a county-by-county basis, using sales in each county during the previous year of agricultural parcels that are 38 acres or more to buyers who intend to use the land for agricultural purposes. Agricultural land that is sold in less than 38 acre parcels or that is intended to be used for development or recreational purposes will not be used by the Department of Revenue in calculating the average fair market value of agricultural land. Use value will also be calculated on a per-acre basis for each county.
Exceptions and Deferrals
The new changes also include some exceptions to the use value penalty. A penalty is not owed for land that is converted to:
- Swamp or waste land, per the definition of “undeveloped land” under Wis. Stat. § 70.32(2)(c)4;
- Productive forest land, as defined under Wis. Stat. § 70.32(2)(c)2; and
- Land classified as "other," as defined under Wis. Stat. § 70.32(2)(c)1m (includes farm residences, buildings and improvements, and the land necessary for those buildings and improvements).
Also, no penalty is owed if the amount of the penalty is less than $25 per acre for land that is converted.
A person is also exempt from the penalty if the person stops farming the land for a year, but then commences farming the land in the subsequent year. The penalty may be deferred for a year (with interest) if the person stops farming the land for a year, intends to commence farming the land in the subsequent year, but actually fails to farm it.
Payment of the Penalty
The penalty is to be paid to the county in which the land is located no later than 30 days after the penalty is assessed. If the penalty is not paid on time, the penalty will be subject to interest at the rate of 1 percent per month until the penalty is paid.