In 1978, the legislature passed an act enabling the valuation of farm and timberland at its current use value instead of market value. The Code of Alabama 1975 defines market value and current use value as:
- Market value – The estimated price at which the property would bring at a fair voluntary sale.
- Current use value – The value of eligible taxable property based on the use being made of that property on October 1 of any taxable year; provided, that no consideration shall be taken of the prospective value such property might have if it were put to some other possible use.
The law enacted in 1978 did not prescribe a set method to determine current use value. In 1982, the legislature amended Title 40-7-25.1 to include a definite formula for the calculation of current use values. The amended law set specific requirements for determining capitalization rates, the top three crops in Alabama, the costs of production, and the average price for pulpwood. Each year, the Alabama Department of Revenue gathers the necessary data from the prescribed sources in order to calculate new current use values for distribution to the county tax assessing officials.
Over the years, the department has encountered various problems obtaining the necessary data to make the current use calculations. For several years, a capitalization rate was unobtainable due to the Federal Land Bank of New Orleans going into receivership, followed by Federal Land Bank of Jackson Mississippi going into receivership. Finally the Federal Land Bank of Dallas Texas, which handles Alabama, agreed to furnish the required rates. The costs of production for row crops must be obtained from the U. S. Department of Agriculture. The USDA does not always publish the costs data in a timely manner thus causing a delay in determining the current use values of row crops and pastureland.
Many people ask the question, “Why is the current use value for agricultural land separate from market value?” The general opinion was that a farmer should not be penalized by paying higher taxes on farmland that has a market value based on the speculative use of the property for uses other than farmland. Often, the market value of farmland in or close to a city, or other developing area, will have a higher market value because the highest and best use of the farmland may be for a subdivision, shopping center, industrial site, or other use, which brings a higher value than farmland. Current use valuation allows the valuation of the farmland to be based on the actual use of the property, rather than what the use might be if the property were sold or developed.
For more information relating to current use value of eligible Class III property, view the Current Use Valuation-Departmental Regulations, Rule 810-4-1-.01 .
Qualifications & Application Procedures
The qualification and application procedures for current use valuation of property in lieu of fair and reasonable market valuation is set out in Title 40-7-25.1 and 40-7-25.2. A property must be Class III (defined as all agricultural, forest, and residential property, and historic buildings and sites) in order for property to qualify for current use valuation:
- Agricultural and Forest Property: all real property used for raising, harvesting, and selling crops or for the feeding, breeding, management, raising, sale of, or the production of livestock, or for the growing and sale of timber and forest products.
- Residential Property: only real property, used by the owner thereof exclusively as the owner’s single-family dwelling.
- Historic Buildings and Sites: regardless of the use to which such property is put, all buildings or structures (1) determined eligible by the state historic preservation officer for listing on the National Register of Historic Places; or (2) located in a registered historic district and certified by the United States Secretary of the Interior as being of historic significance to the district.
Taxpayers interested in obtaining current use valuation must make an application with the county assessing official between October 1 and January 1 of any given year. The application requires a description of the property and a general description of the use to which the property will be put. Aerial photographs may be required for forest property to be considered for current use valuation. The tax assessing official may request any additional information to aid him in determining whether the real property qualifies for current use value. Once current use valuation is granted by the county assessing official, the owner of the property is not required to repeat the application for the subsequent years. Following the sale or other disposition of property valued at current use value, the new owner must apply for current use valuation between October 1 and January 1, otherwise, the property will be valued at its fair and reasonable market value.
The county assessing official will analyze the application to determine if the referenced property qualifies for current use valuation. On parcels of five acres or less, the assessing official may require submission of additional data such as site management plans from the Alabama Forestry Commission.
Class III property that has been assessed at a current use value in lieu of fair and reasonable market value, may be subject to the rollback provisions in Title 40-7-25.3 if either one of the two following conditions are met:
- If the sale or other disposition of property valued at its current use value is followed by a conversion of the property to a use not qualified for current use valuation, within two years of the date of sale or other disposition, then the rollback provision will apply.
- If taxable property valued at its current use value is converted to a use not qualified for current use valuation, then the rollback provision will apply.
Once a determination has been made that the rollback provision applies to the property, the assessing official must calculate the amount of taxes that would have been payable on the converted property if the sales price or the fair and reasonable market value, whichever is greater, had been used instead of the current use value. The calculation of additional taxes is for the three years preceding the tax year beginning on the October 1 following the conversion of the property. The amount shall be additional taxes to be collected on first assessments prepared after the conversion of the property.
Title 40-7-25.3 states that the rollback will be for a three-year period prior to the October 1 following the conversions. If the property subject to conversion from current use were subject to current use valuation for less than three years, then the rollback would cover only the actual number of years less than three years that the property was subject to current use.
When a rollback becomes apparent, the sales price or market value, whichever is higher, will be used to calculate the additional taxes due. The assessed value will then be calculated using the Class III assessment ratio of 10%, not the 20% Class II assessment ratio.
Additional taxes resulting from a rollback are charged against the owner of record of the property on the October 1 following the date of conversion. Therefore, the person that caused the conversion and rollback may not be the person that pays the additional taxes on the rollback if the property changed ownership between the conversion and the lien date of October 1.
There are many other factors that influence the actual rollback. The county assessing official often refers to the numerous Attorney General opinions that have been written on the subject as well as carefully reading the applicable sections of the Code of Alabama and related court cases.
For more information relating to current use value of eligible Class III property, view the Current Use Valuation-Departmental Regulations, Administrative Rule 810-4-1-.01.
This directive is issued for the purpose of establishing current use values and the procedures required in Title 40-7-25.1 through 40-7-25.3, 1975 Code of Alabama.