Current Use Taxation

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Current Use Taxation

In brief

Use Value Appraisal, or “Current Use” as it is commonly known, is a property tax incentive available to owners of agricultural and forestry land in Vermont. Eligible landowners can enroll in the program to have their land appraised at its Current Use (farming or forestry) value rather than fair market value. This method of appraisal results in significant property tax savings to the landowner in every year that the land remains enrolled in the program. While enrolled, the land cannot be developed and, instead, must remain agricultural or forest land. If the land gets developed then the landowner will lose the favorable tax status and pay a financial penalty.

Summary

Many landowners in Vermont make their living by working the land. They raise cattle, grow crops, and manage forests. These businesses require a substantial amount of land, which means more property taxes that the landowner must pay.  The Vermont legislature adopted Use Value Appraisal in 1978 to help relieve the burden of high property taxes on these landowners (see Title 32, Ch. 124). By reducing the economic burden on farmers and forest owners, the state sustains the working landscape, supports the owners that work the land, and helps maintain the state’s traditional settlement pattern.

Vermont taxes property based on fair market value (see 32 V.S.A. § 3481). The policy behind Current Use taxation, the common name for the Use Value Appraisal policy, is that farmland and forests should not be taxed at the same rate as developed land. This policy creates a property tax based on the land’s use value and not its market value. “Current use” indicates that the property tax will last as long as the land is used for forest or farmland. If the land gets developed, then the tax changes to reflect the fact that the land is no longer used for forestry or farming. Thus, Current Use taxation is an incentive for landowners to retain the agricultural use of their property. They are free to develop their land, but if they do, they lose the favorable tax treatment.

Current Use was designed as property tax break to relieve economic pressures on farmers and forest owners who enrolled in the program. The tax break helps eligible landowners stay economically viable by lowering the amount of property tax they have to pay each year. Another goal is to deter development on our farms and fields, which directs new development to our town centers. This not only helps towns retain their historic character, but it also helps farms maximize their capacity to supply local food.

Eligibility requirements

To enroll in the Current Use program, landowners must submit an application to the Current Use Land Program within the Vermont Department of Taxes. Each application must include a map of the parcel. The state approves applications for eligible “agricultural land” or “forest land,” as specified in the statute.

Agricultural Land
There are four different ways for owners of agricultural land to be eligible for Current Use:

  1. The landowner is a “farmer” as defined by the state statute (see 32 V.S.A. § 3752(7)), which requires that 50% of the owner’s annual gross income derives from the business of farming.
  2. The landowner’s land is used by a “farmer” under a written lease for a term of no less than three years. This allows agricultural landowners who do not farm the land themselves to still qualify for the favorable taxation.
  3. The landowner owns less than 25 acres of land but produces “farm crops” that exceed $2,000 per year in sales. “Farm crops” include such things as animal fiber, cider, wine, and cheese)
  4. Landowners who own a minimum of 25 acres and actively use that land to grow hay, cultivate crops or fruit-producing trees, or pasture livestock.

An added benefit for eligible agricultural landowners is the exemption of farm buildings from any form of property taxation. This exemption includes housing for any farm employees on the property that was in use during the previous year.

Forest Land
There are two requirements for the forestry designation under Current Use. The first requirement is that the landowner must have an approved forest management plan. Every parcel of forest land must have a forest management plan approved by the Department of Forests, Parks and Recreation. The plan must be renewed every ten years. The state will send an inspector to the property at least once within that time to ensure that the landowner has complied with the forest management plan. Failure to comply constitutes “development” within the statute and the property taxes on the land will revert back to fair market value.

The second requirement is that the landowner must have a minimum of 25 contiguous acres of undeveloped land. Eighty percent of the acreage must contain productive forest land. However, this means that up to twenty percent of the acreage does not need to have forest land, so long as that land remains undeveloped.

Conservation Land
Conservation land is a type of Current Use eligibility within the forest land designation. A landowner who qualifies for Current Use under the forest category can include any acreage that contains wetlands, endangered species habitat, or any areas of important public access. These areas must be approved by the county forester, and in order to qualify, the landowner must submit a conservation management plan in addition to the forest management plan.

Two-acre Homestead Exemption
An important thing to remember is that all acreage requirements for eligibility do not include the 2-acre homestead exemption. Thus, a landowner with 25 acres of forest land and a house on that property will not qualify for Current Use taxation because the homestead exemption removes two acres, leaving the landowner with only 23 acres of forest land. Thus, to meet any 25-acre requirement for forest land, the landowner will have to own at least a 27-acre parcel.

Development Penalties
“Development,” as defined in the statute, includes the construction or enlargement of any building or road on the property that is not associated with farming or timber harvesting. “Development” also includes any subdivision of land that results in a parcel that is less than 25 acres. If land in the Current Use program gets developed then the owner has to pay a penalty that varies depending on the length of owner’s enrollment in the property. If the landowner’s enrollment in the Current Use program is less than 10 years then the landowner must pay 20% of the fair market value of the developed property.

If a landowner enrolled in Current Use for less than 10 years decides to build another home on the property, that other home will result in a 2-acre homestead. So the landowner must pay 20% of the fair market value of the two developed acres only. The development penalty changes to 10% if the landowner’s enrollment in the program exceeds 10 years.

Landowners can avoid the development penalty with a little planning ahead. If the landowners think that they might add another homestead to the property, then they can carve out two acres from the outset, provided that they have enough acreage to still qualify. The point is that enrollment in the Current Use program is not an all-or-nothing agreement. If part of the land gets developed then the landowner must pay for that part only. A landowner is also free to add as much or as little land as she wants in the original application for enrollment.

How the program works

Vermont requires local listers to use fair market value for property tax appraisals. Fair market value incorporates data from local real estate sales to assign values to property within the municipality. The listers’ use of this data varies depending on the municipality, but the basic method of valuation for one acre of land is based on the average price per acre among real estate sales. This determination of the “highest and best use” of property is how the state predicts fair market value. Because the vast majority of real estate sales involve the development of land (very few people buy a housing development and turn it into farmland), the vast majority of the state’s valuation of land for property tax purposes is based on the development value of land.

Rather than force farmers and owners of forest land to pay property taxes based on fair market value, the state allows eligible landowners to pay property tax based on an appraisal of “Current Use value.” Each year, the state sets a price per acre for agricultural land and forest land. These prices reduce the overall appraisal value because development potential is not a factor in the valuation of the land. The state determines what an acre of farmland is worth as farmland, not what it is worth according to real estate sales of any type of land or development.

There are two important aspects of property tax values where Current Use taxation does not apply. First, it does not apply to homes and other residential improvements. Second, it does not apply to the land beneath the home or improvements. This land is the “homestead” and the state automatically exempts two acres to account for the home, roads, and other improvements.  The state considers these two acres developed and therefore exempt from use value appraisals. This land area would be taxed at the market rate.

Effect on property tax values

The typical complaint about modifications to property tax policy is that a tax reduction for one person is often considered a tax increase for everyone else in town. The thought being that “the money must come from somewhere.” However, this is not actually the case under the Current Use policy established in Vermont. The state reimburses each municipality for every penny it loses from the reduced revenues caused by Current Use. Therefore, municipal property taxes do not rise as a result of this policy. Additionally, Current Use provides a source of revenue in the form of development fees. Whenever landowners leave the Current Use program they must pay a fine to the state. The money from the fine increases state revenue, which helps fund the state’s reimbursements to municipalities.

There are also studies that show how farmland typically cost municipalities very little money in terms of government services like public water and sewage. A study by the American Farmland Trust shows that residential development costs an average of $1.16 in government services for every $1.00 of economic benefit gained, compared to the agricultural land’s cost of $0.35 in services. Continuing to have these lands in agriculture and forestry practices can save municipalities many dollars of revenue because the extension of such services is not necessary. For more on the effect of land conservation on property taxes, see the resource section.

Resources

Vermont Statutes Online – Current Use statutes

Vermont Department of Taxes – Applications and other forms

Vermont Division of Forestry – Forestry information for the program

Program Manual  from the Agency of Natural Resources that includes financial statistics up to 2005

Land Conservation and Property Taxes in Vermont” by Deb Brighton.

For more on the economic benefits of land conservation, view the following report on our website: “Overview of Cost Benefit Study Options for Land Use Decisions.”

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