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