Valuing the Family Farm for Property Tax Purposes – Part I
Washington’s property tax system allows real property used as a farm to be valued differently than other property. The Washington open space designation provides a reduction in annual property taxes for land used for commercial agricultural purposes.
Property Tax Classification as Farm and Agricultural Land
An owner may apply for his or her farm to be valued based on its current use as opposed to its true and fair value. Property tax is assessed on the value of real estate as determined by the county assessor.i Generally, Washington real property values are determined based on the “true and fair value” which includes criteria such as sales of similar property within the last five years and potential income uses.ii The Open Space Taxation Act created three property classifications which allow property to be taxed based on current use value: open space, farm and agricultural land, and timberland. Farm values will be derived from the farm’s earning capacity.iii This means a farm may be valued as a farm rather than the subdivision it could be.
To receive this benefit, a farmer must apply for current use classification on a form provided by the county assessor.iv A qualifying farm property must generally operate commercially, and meet other specific requirements, depending on the size and operations of the farm. Be aware that the state evaluates claimed uses and has recently increased its attention.
Twenty Acre Farms.
A Twenty-acre farm needs to be primarily used to produce livestock, agricultural commodities or a similar commercial activity. A large farm may also qualify if it is enrolled in a federal conservation program.v
Farms Five or More Acres but Less Than Twenty.
A mid-sized farm, between five and twenty acres, must be primarily devoted to agricultural use and must generally produce an income of two hundred dollars or more per acre for three of the five years prior to filing the application.vi
Mid-sized farms may be relieved of the income requirement if it produces certain kinds of crops. Farms that grow standing crops, such as a Christmas tree farm, or vineyard, may instead demonstrate a biannual investment of one hundred dollars or more per acre if the farmer expects a harvest within seven years.vii The crop may be expected within fifteen years if the farm is used to grow short rotation hardwoods.
Farms Five Acres or Less.
A five acre or smaller farm needs to be primarily devoted to agricultural use and must produce an income of fifteen hundred dollars annually.
Other Permitted Uses
The current use farm classification extends to other activities. A farm can operate as an equestrian business providing stabling, training, riding, clinics or classes, shows, or simply grazing space.viii An equestrian operation must meet the size-specific requirements as well. Horticultural operations may also qualify.ix However, a horticultural farm cannot be used primarily for retail sales. If the land is less than five acres and used primarily to grow plants in containers, then no more than twenty-five percent of the space may be open to the general public for retail sales. A horticultural farm less than twenty acres is subject to the income requirements based on its size. If more than twenty percent of the horticultural farm is paved, the paved portion does not qualify based on the horticultural use. However, the paved portion may qualify as an incidental use.
An incidental use must be compatible with agricultural purposes.x Examples of incidental uses include wetland preservation or farm worker residences. The incidental use must not take up more than twenty percent of the otherwise qualifying land. A parcel with accessories necessary to produce, prepare, or sell agricultural products must exist together with the lands producing those products. However, a one to five-acre parcel that is not adjacent to the farm land will still qualify if it is used as an integral part of the farming operation taking place on a qualified parcel.
Land used for housing employees and the farm operator or land owner’s principal residence may qualify if it is on or adjacent to a qualified parcel and the housing use is integral to the farm operation.xi The farm operator or owner must manage the farm business from the residence.xii Each employee must be work on the farm at least twenty-five hours per week either year round or seasonally during planting, growing, or harvest season.xiii The parcel, or total of contiguous parcels, on which the housing sits must be twenty acres and either be primarily used to produce livestock or agricultural products or enrolled in the federal conservation program.xiv
An application for farm valuation may be made at any time. An application may be made any day of the year, but will apply to the year after the application is made.xv If the land lies in multiple counties, an application must be made to each county.xvi An application will be deemed approved unless the applicant receives a contrary notice before May 1st of the year following submission, which may deny the application in whole or in part.xvii
If the application is approved, the classification granted will last until the owner requests removal, the classified use ceases, or a transfer causes termination.xviii If denied, an applicant must wait a year before attempting another application.xix The application form will require information necessary to evaluate the requested classification and a statement verifying the truth of the submitted information.xx
The assessor may require data concerning typical crops, federal tax returns, sales receipts and other income data.xxi The application form must also include an awareness statement regarding the tax liability that may be incurred if the property ceases to be classified as a farm.xxii
Additional Tax, Reclassification, and Appeals
Tax and penalties are assessed against properties that are removed from open space—purposefully or inadvertently. Termination of farm classification triggers an additional tax equal to the last seven years of tax savings—i.e. seven times the difference between what was paid as open space and what would have been paid based on the full value of the land.xxiii The statutory interest rate for deficient amounts shall be applied to each amount per year it could have been earlier paid.xxiv This means multiple years of interest will be due on the additional tax owed. A penalty equal to twenty percent of the additional tax and interest will also be charged unless an exception applies.xxv
The penalty portion of farm classification termination charges may be avoided. Additional tax is unnecessary if merely reclassifying from farm land to open space or timberland classifications, or as forestland under the timber and forestland statutes.xxvi The penalty does not apply if the owner follows the statutory withdrawal request procedure.xxvii A withdrawal request may be made after the initial eight years of farm classification, and after the request two assessment years must pass before the assessor will remove the farm classification.xxviii The additional tax and interest are still due after a proper withdrawal.
Certain transfers are exempt from all farm classification termination charges. The additional tax, interest and penalty are not owed when classification is lost due solely to: a transfer to a government entity in exchange for other Washington real estate; a sale, transfer, or taking due to eminent domain; a natural disaster; an official action by state or local agency which disallows the present land use; qualified transfers to a church; transfer of qualified preservation or conservation interests to a qualified agency or organization; loss of qualification as employee or owner housing integral to farm use; or the creation, sale, or transfer of riparian or certain conservation easements.xxix Also exempt are sales within two years of a previous fifty-percent owner’s death.xxx However, the fifty-percent owner’s land must have been assessed based on special classification, i.e. open space, farm, timberland, or forestland, continuously from 1993.
There is also a good faith exception to the termination charges. If it is discovered that land was improperly classified as farm land, the classification will be lost but the owner will not be charged if the classification did not occur due to a fault of the owner (also applies to open space or timberland).xxxi Fault in this context means purposefully lying or omitting details due to the assessor that contribute to approval or classification continuation. The good faith exception will not prevent charges from becoming due when there is an independent basis for imposing them.
When property is withdrawn from farm classification by the owner or the assessor, the applicable charges are due thirty days after the treasurer issues a statement for them.xxxii If the termination is caused by a sale, the charges are due from the seller at the time of sale.xxxiii The charges become an attached lien with priority over mortgages, judgments, and other responsibilities chargeable against the property.xxxiv
An applicant or owner may appeal an adverse determination. An applicant may appeal a denied application within thirty days of when the denial was mailed.xxxv To appeal, taxpayers submit a petition to the county board of equalization on a petition form maintained by the department of revenue (Taxpayer Petition to the County Board of Equalization for Review of Current Use Determination). An owner may also appeal the interest rate used to determine the farm value after the annual publication of the rate in the Washington State register.xxxvi
Farm Classification is a Long-Term Commitment
The benefits of Washington’s property tax farm classification generally require a long-term commitment. The farm classification is at least a ten-year commitment.xxxvii The property tax benefit of farm classification begins once granted. However, the charges for terminating farm classification counteract the benefits for operations lasting less than ten years.
The additional tax and interest are designed to recoup the previous seven years of tax benefit, with the penalty adding to the burden for classification termination. There are exceptions from liability for the additional charges but the statutory withdrawal method assumes some recouping will occur. If the classification is withdrawn by the owner at the earliest time permitted, seventy percent of the tax savings will be due back to Washington. This percent grows smaller as time passes.
A farm family gains the best advantage from farm classification by planning to keep their operation going—the longer the better. Tax savings become locked after eight years, as the tax look back is seven years. The tax savings can provide extra resources for the farm and to grow the farmer’s estate for when his or her descendants inherit the farm. It is also important to consider the estate tax farm valuation rules when it comes time to plan the farm’s transition to the next generation. Assuming the next generation is willing to take on the farm business, these tax tools provide powerful incentives to farmers and their children.
i RCW 84.52.040.
ii RCW 84.40.030.
iii RCW 84.34.065(1).
iv RCW 84.34.030.
v RCW 84.34.020(2)(a).
vi RCW 84.34.020(2)(b).
vii RCW 84.34.020(2)(d).
viii RCW 84.34.020(g).
ix RCW 84.34.020(2)(h).
x RCW 84.34.020(e).
xi RCW 84.34.020(f).
xii WAC 458-30-317(2)(b).
xiii WAC 458-30-317(2)(a).
xiv WAC 458-30-317(3).
xv WAC 458-30-215(5).
xvi WAC 458-30-215(7).
xvii RCW 84.34.035.
xviii Washington Department of Revenue, Open Space Taxation Act, Pg. 5, 2017.
xix WAC 458-30-215(8).
xx WAC 458-30-215(6).
xxi Washington Department of Revenue, Open Space Taxation Act, Pg. 4, 2017.
xxii RCW 84.34.030(2).
xxiii RCW 84.34.108(4)(a).
xxiv RCW 84.34.108(a)(b).
xxv RCW 84.34.080(2).
xxvi RCW 84.34.070(2).
xxvii RCW 84.34.108(4)(c).
xxviii RCW 84.34.070(1).
xxix RCW 84.34.108(6).
xxx RCW 84.34.108(6)(k)
xxxi RCW 84.34.108(i).
xxxii RCW 84.34.100.
xxxiii WAC 458-30-300(4); WAC 458-30-305(3).
xxxiv RCW 84.34.108(5).
xxxv WAC 458-30-225(5)(b).
xxxvi WAC 458-30-260(7).
xxxvii RCW 84.34.070(1).
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