Considering Alternative Energy on the Farm? Consider the Property Tax Consequences!
Updated: Jul 23, 2020
By Sarah Everhart
There are a lot of issues to consider when deciding whether to install an alternative energy project (wind turbine, solar panels, etc.) on your farm such as lease terms, future land use restrictions, and compliance with local zoning laws, to name a few. For an overview of these considerations, read this recent post. Given the host of things to consider, it is easy to overlook the effect the project will have on your property taxes – but every economic factor is important in the overall analysis.
If your property is currently used for agriculture or is wooded, the land is most likely assessed at the lower Agricultural Use Assessment rate. To learn more about this assessment, read our detailed post.
In short, the State Department of Assessments and Taxation (SDAT) administers the Agricultural Use Assessment and determines whether farmland is “actively used” and to qualify for assessment at the lower rate. To make the determination, the SDAT considers the nature of the agricultural activity such as whether 1) the land is tilled or is pasture, 2) the agricultural activity is generally recognized by the agricultural community, 3) the agricultural activity is the land’s primary use, and 4) the agricultural use is continuing or temporary. Uses which don’t qualify as “actively used” such as tenant houses and non-agriculture related structures are assessed at a higher fair market value property tax rate. Therefore, when land is converted from “actively used” for agriculture to a different use such as an alternative energy infrastructure use, a higher property tax rate is triggered.
When else is a tax consequence triggered? An Agricultural Transfer Tax is due when agricultural land is transferred and the purchaser plans to convert the land to a non-farm use, and/or when the landowner requests rezoning, which results the land’s more intensive zoning classification. The only way to avoid the Agricultural Transfer Tax is for the purchaser to sign a Declaration of Intent that the property will be farmed for 5 years following the transfer. What happens if a few years (before the expiration of the 5 years) after a purchase of farmland, a property owner decides to install an alternative energy project on production land, violating the original Declaration of Intent for the land for the full 5 years? The Agricultural Transfer Tax plus a penalty of 10% will be imposed.
The best way to figure out the effect an alternative energy project will have on your property tax bottom line is to contact your local tax assessment office. In researching this post, I called my local tax assessment office and inquired as to the average assessment value for solar infrastructure use. According to my friendly local tax assessor, the tax assessment offices on the eastern shore of Maryland are assessing land with solar infrastructure at $20,000/per acre. What is the basis for this value? This value comes from an average solar lease rental value of $1,500 an acre per month. This is an estimated value that can be challenged by presenting the solar lease with a higher or lower rental value. Of course, the overall tax calculation will be based on your individual county’s tax rate multiplied by the assessment value per acre.
Once you know the tax consequence of adding an alternative energy project on your farm, you can factor the increase in taxes into your analysis of whether or not the project makes good fiscal sense. Do this analysis before negotiating any energy development leases so that you can shift the tax burden to the energy development company during the lease negotiation if the lease does not already have it allocated this way.