There are several programs in Pennsylvania that benefit farmers and agribusiness owners and provide useful tools in achieving success in your farm or agribusiness. The two most common real estate programs, the Preferential Assessment of Farmland and Forest Land Program, known as Clean and Green, and the Pa. Agricultural Conservation Easement Program, often are confused with one another. This article will describe the basic principles of each of those programs as they exist in Pennsylvania. Other states may have similar programs, but this article only addresses the programs in Pennsylvania.
The Preferential Assessment of Farmland and Forest Land Act known as the “Clean and Green Act” is administered by the tax assessment offices of the Pennsylvania counties. There is no component of state government involved and it is completely administered at the county level.
Clean and Green reduces the tax assessment value of farm ground, which reduces the taxes paid by the land owner. If your farmland is ten (10) acres or more, you can file an application with the County Assessment Office. In determining the ten (10) acre size, you can group parcels together so long as they are adjacent and in aggregate exceed ten (10) acres. In the Clean and Green program, the land retains all of its dwelling rights, also known as development rights. These rights stay with the farm and are not transferred to the county. The land owner can then use those dwelling rights or development rights at any time in the future.
However, in the event that the land owner uses those development rights and subdivides more than two (2) acres per one (1) calendar year or more than ten percent (10%) of the total acreage of the parcel or parcels that were admitted to the Clean and Green program on one application, then there is a violation and rollback tax implications for the entire parcel. For example, if I own two adjacent parcels, one consisting of five (5) acres and one consisting of twenty-five (25) acres, I can put both of them on one Clean and Green application. After the application is accepted, I can transfer two (2) acres in any calendar year. This could be one (1) two-acre lot, or two (2) one-acre lots. But I can never transfer more than three (3) acres total, because ten percent (10%) of thirty (30) acres is 3 acres. If I violate these provisions, then I must pay the rollback tax.
The rollback tax is a recapture by the County of the additional tax which would have been owed for the past seven (7) years if the land had not been in the Clean and Green program. This is calculated by comparing the Clean and Green assessment to the fair market value assessment. In addition, interest is assessed upon the tax difference. Once a property that has been placed in Clean and Green violates the provisions the Act, the Clean and Green status is terminated and a bill for the rollback tax will be issued.
In contrast, the Pa. Agricultural Conservation Easement Program, while often administered by the county, has a state counterpart in the State Agricultural Land Preservation Board. The county land preservation boards are funded by state funds, but there may be some county funds that are also utilized.
In the Conservation Easement Program, the land owner actually grants to the county and/or state, an easement on their lands that prevents the land owner from utilizing the development rights. The easement is very comprehensive, requires the property to remain in agricultural use and prohibits development and commercial use. In exchange for the easement, the land owner is actually paid money for the development rights. Unlike Clean and Green which simply reduces your taxes, in the Conservation Easement Program, the land owner actually receives dollars in exchange for their development rights.
There are no rollback provisions in the Conservation Easement Program because the easement is perpetual. Therefore, once the easement is granted by the land owner, the land owner can never change his or her mind. The land will be preserved in perpetuity.
In addition to the state/county Conservation Easement Programs that pay money for conservation easements, there are some non-profits, typically known as Land Trusts that administer conservation easement programs. The land owner again grants a conservation easement to the Land Trust that prohibits development and is perpetual. However, the land owner is typically not paid for the easement, but rather the grant of easement is considered to be a tax deductible donation.
Be sure to look for future articles that discuss 1031 Like Kind Exchanges and how to defer tax and acquire additional land in conjunction with Conservation Easements.