Underwriting Q&A: Rollback taxes and supplemental taxes – TEXAS

Q: Are “AG” rollback taxes the only type of rollback tax that can be assessed for the collection of prior years’ ad valorem taxes and are they covered in a title policy?

A: There are several types of rollback taxes, or supplemental taxes, which will capture and assess taxes for prior years.  The types of rollbacks that we most frequently see are the rollbacks that are commonly referred to as “Ag” rollback taxes.  This type of rollback of taxes is more likely to be for the loss of an open-space or wildlife management special valuation, rather than a true Ag special use valuation that requires the land to be devoted exclusively for agriculture, which must be the owner’s occupation and primary source of income to be eligible. This category of exemptions is actually a group of special use valuations rather than true exemptions.  The loss of the open space (1-d-1) status or the wildlife management status can result in a 5 year tax rollback, to recover the difference between the amount actually paid in those 5 prior years and what would have been due if a market value valuation had been utilized.  The loss of an Ag special use valuation can result in a 3 year tax rollback bill.

The tax exception found in Texas title policies does not cover the rollback taxes when there is a change in use or ownership that causes the loss of the special use valuation:

Standby fees, taxes and assessments by any taxing authority for the year ___, and subsequent years; and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership, but not those taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year.

Procedural Rule P-20.B provides the parameters for amendment of the tax exception in a Lender Policy if the property is under Ag.  The Owner’s Policy may not be amended to remove the exception for rollback taxes.

1. In connection with the issuance or amendment (after issuance) of any Loan Policy or of any Loan Title Policy Binder on Interim Construction Loan (Interim Binder), and upon payment of the premium required under Rate Rule R-19, the words: “and subsequent taxes and assessments by any taxing authority for prior years due to change in land usage or ownership”, as contained in the standard tax exception may be deleted by:
   1. Deletion of such words upon the policy or binder form, either by checking the appropriate box on a Form T-2 or T-2R or by lining through the words or by producing an electronic form with the words; or
   1. By attachment to the policy or binder of endorsement form T-30.

The deletion of the above phrase from the standard tax exception is hereafter referred to as “insure or insuring against rollback taxes”.

• A Company may not insure against rollback taxes unless:
  • The Company has satisfactory evidence in its file that the assessed taxes for the current year are not based on an agriculture or open-space valuation; or
  • (i) The rollback taxes have been assessed by all of the taxing authorities;

(ii) The rollback taxes are collected at closing by the Company, and

(iii) The Company will pay the roll back taxes in the ordinary course of business.

The other types of rollback taxes or supplemental taxes that we encounter are:

• Omitted improvements – Section 25.21(a), Tax Code:  (OMITTED PROPERTY).  (a)  If the chief appraiser discovers that real property was omitted from an appraisal roll in any one of the five preceding years or that personal property was omitted from an appraisal roll in one of the two preceding years, he shall appraise the property as of January 1 of each year that it was omitted and enter the property and its appraised value in the appraisal records.
• Church sale – Section 11.201, Tax Code: (ADDITIONAL TAX ON SALE OF CERTAIN RELIGIOUS ORGANIZATION PROPERTY.  (a)  If land is sold or otherwise transferred to another person in a year in which the land receives an exemption under Section 11.20(a)(6), an additional tax is imposed on the land equal to the tax that would have been imposed on the land had the land been taxed for each of the five years preceding the year in which the sale or transfer occurs in which the land received an exemption under that subsection, plus interest at an annual rate of seven percent calculated from the dates on which the taxes would have become due.

(b)  A tax lien attaches to the land on the date the sale or transfer occurs to  secure payment of the tax and interest imposed by this section and any    penalties incurred.  The lien exists in favor of all taxing units for which the tax is imposed); and

• Retroactive removal of an improper exemption – Section 11.43(i), Tax Code:  (i)  If the chief appraiser discovers that an exemption that is not required to be claimed annually has been erroneously allowed in any one of the five preceding years, the chief appraiser shall add the property or appraised value that was erroneously exempted for each year to the appraisal roll as provided by Section 25.21 of this code for other property that escapes taxation.  If an exemption that was erroneously allowed did not apply to all taxing units in which the property was located, the chief appraiser shall note on the appraisal records, for each prior year, the taxing units that gave the exemption and are entitled to impose taxes on the property or value that escaped taxation.

Note that the tax exception in the Texas title policy has an EXCEPTION TO THE EXCEPTION – in other words, coverage is given for taxes or assessments for prior years because of an exemption granted to a previous owner of the property under Section 11.13, Texas Tax Code, or because of improvements not assessed for a previous tax year.

To clarify, insurance coverage is provided in a title policy when a Section 11.13 exemption (residence homestead, or over 65 or disabled residence homestead exemption), is carried improperly and is later removed and a supplemental tax bill issued to recover full taxes for the years the exemption was improperly carried.  The same is true for a supplemental tax bill issued for omitted improvements.