# Texas Ag Exempt is a trap



## Driftwood1 (Aug 28, 2008)

:Bawling:
Hi everyone, 
Been reading the board a while now and finally had to join to relay our dilemma..

We have a home and acreage in Texas which is homesteaded and has an Agricultural Exemption on it.. 
The place is paid for, and recently we looked into a home equity loan to finance an addition.. 
WELL. Home Equity on an AG exempt property is ILLEGAL in the state of TX.
Even though the small portion of the land which is homesteaded that the house sits on is NOT Ag exempt, since it is all one property, we cannot access a dime of equity.. 
My wife is gutted.. spend years to pay down the place early, only to find out the equity in effect doesnt exist.. 
They tell us we will need to subdivide it.. 

I just had to put it out there, that people looking into AG property should be very cautious. 
We'll let you know how it all turns out.. 
Cheers


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## SteveD(TX) (May 14, 2002)

Home Equity loans are generally made to individuals who already have a first mortgage. You say your place is paid for, why get a home equity loan? Why not just get a regular mortgage?


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## Driftwood1 (Aug 28, 2008)

Its more complicated than that. 
We had wanted to add -on, but also wanted to pay off an adjoining piece of land. Taking "cash out" for any reason on and Ag exempt is also illegal. 

We are now looking to simply get home equity line of credit OR loan, and not pay off or take any cash out, and they still tell us, any equity type loan on Ag exempt is not allowed. 

I said the place was paid off but that was only 99% accurate, the place was appraised @ nearly 600K but we still owe 27K (which we have in the bank).
Are you saying we could pay off the mtg and get a new one? This would still not let us pay out the adjoining lot we own I suspect though. 

Any help appreciated. At this point we may just drop the exemption and take the tax hit. My wife will not stand for having all our money in the house without being able to use it!! 
Thanks again



SteveD(TX) said:


> Home Equity loans are generally made to individuals who already have a first mortgage. You say your place is paid for, why get a home equity loan? Why not just get a regular mortgage?


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## SteveD(TX) (May 14, 2002)

Absolutely a new mortgage would be structured so as to pay off the existing loan. Lines of credit and home equity loans are typically riskier investments for the lender since they are in an inferior lien position to the first mortgage. As a result, their interest rates are higher. A new mortgage (1st lien) will be a lower rate. Typically a new mortgage will be on the home and the 1 acre it sits on, but there are exceptions. I would find a knowledgeable lender or mortgage co. familiar with the various types of loans - conventional, FHA, etc.. They should be able to guide you through the process.

Just because you can't get a first lien mortage on your acreage does not mean your equity doesn't exist. That equity is just not as accessible.


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## mylala (Jun 3, 2008)

WOW!!!! What a position to be in. Don't ruin it and go into debt. Save and build.


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## fordy (Sep 13, 2003)

....................No way would I voluntarily give up an Ag exemption , it takes like 5 years too get it back and you have to KTA to get it back . , fordy


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## agmantoo (May 23, 2003)

The Ag exemption is not on the dwelling and the land (1/2 acre) the home is on where I live. I have the home and its property on a separate deed. This way I can get home owners insurance and only carry liability on the land. This is a tremendous savings. Just cut the home loose on paper from the Ag exempt and you will fall under the regulations imposed on conventional home owners. An attorney should be able to do this without a survey. I am unaware of any downside on doing this but there are numerous subtle benefits.


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## Beeman (Dec 29, 2002)

The less involved we become with the gov't the better.
Is the land being used for agriculture or is it just for tax benefit?


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## Driftwood1 (Aug 28, 2008)

This is apparently what we will need to do, split out some land onto a separate parcel. Whether this is a separate deed or not I dont know yet, we are just getting started, but I dont know anyone in the county on Ag exempt property who has 2 separate deeds... 
And yes, we run longhorns and horses.. 
Cheers




agmantoo said:


> The Ag exemption is not on the dwelling and the land (1/2 acre) the home is on where I live. I have the home and its property on a separate deed. This way I can get home owners insurance and only carry liability on the land. This is a tremendous savings. Just cut the home loose on paper from the Ag exempt and you will fall under the regulations imposed on conventional home owners. An attorney should be able to do this without a survey. I am unaware of any downside on doing this but there are numerous subtle benefits.


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## VALENT (Dec 6, 2004)

I would guess one possible downside to separating home from adjacent pasture/field/etc would be if you were to ever file bankruptcy or have a judgment against you. You might be unable to claim both parcels as your "homestead" and therefore safe from being taken.


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## milkinpigs (Oct 4, 2005)

Texas needs to be much more restrictive on ag exemption,lot of folks really shouldn't be able to receive it.
You didn't seem to think it was a trap when you filed to dodge paying the taxes you should have been paying.


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## Alice In TX/MO (May 10, 2002)

Do not drop ag exemption.

If you have that much property and that snazzy a house, can't you walk in the bank and get a personal loan? That's what I did last time I needed a loan.

"Using equity" means putting your house at risk. Not a good idea.

You also might want to start listening to Dave Ramsey on the radio. He has a financial talk show for people who are confused about money.


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## Guest (Sep 3, 2008)

I don't know much about Texas, but around here, a $600,000 place is not a homestead, it's a palatial estate.


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## Alice In TX/MO (May 10, 2002)

It would depend on what part of Texas. Some areas around Dallas are not much different than California. Also some parts of Austin. My dad built our house there in 1957. It's 1000 sq ft. Two bedroom, two bath. Currently appraised at over $300,000 because of the location.

I was thinking about this thread. Our place in Jackson County is ag acreage and two houses. The houses are on different appraisal documents from the county. You need to talk to your county's appraisal district about separating the houses out. Ours are not on separate deeds.


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## texican (Oct 4, 2003)

I would have to say the worse trap is a home equity loan... irregardless (I love being grammatically incorrect) of what state or what kind of financial position someone finds themselves in.

Borrow money against your home, and if you can't pay, you lose your home. Granted, the OP's reason may be a good reason... I know too many locals who cashed out their equity, and took vacations, or spent the money on consumables... now their homes are worth less, and they owe more than the house is worth. This is one reason so many speculator/gamblers are in trouble, and are defaulting, and wrecking our whole economy.

Texas use to have a Law forbidding home equity loans. No matter how many stupid things a person did, they couldn't lose their homes. Unfortunately, we have a stupid law on the books that allows anyone to vote. Said persons voted in the law, allowing home equity loans, and now, you can lose your home if you gamble with it. 

I'd get a first mortgage as a last resort. Home equity never. I'd work three jobs, and eat beans to pay off the debts and save for needed additions.

Drop your ag exemption and reap the benefits of a much higher property tax bill... I'd pay thousands more if my land weren't ag. I've got a 167 acres, and the taxes on it are around 500. I had one tract of 35acres that I had converted to ag exemption... first year I had it I paid 1K in taxes... dropped to ~100$ afterwards.-


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## Quint (Nov 12, 2004)

Texican hit the nail on the head. Once you own your home and land don't ever let a banker get his grubby hands on it again. All it takes is one unforeseen calamity and you're out on your ear or other sensitive body part.

If you can't walk into the bank and obtain the needed funds on your signature then wait until you can or preferably just save the money first. Yeah it sucks having to wait but it's better than risking your home.


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## Alice In TX/MO (May 10, 2002)

Texican is 100% right.


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## agmantoo (May 23, 2003)

I have a difficult time understanding about 99% of the people on the site and their attitude toward any risk and any debt. The OP is virtually out of debt so they obviously know how to handle their finances. They want to add an addition. Certainly they have the resources but not the available cash that they want to spend out of pocket for the expansion. With the building market in a slump this is the optimum time to hire some good carpenters and to get materials at a decent price. The interest on a home equity loan is deductible. For the price of an addition the risk is certainly not going to put them into a repo situation. They have numerous options even if they suffered a job loss as they have paid for land they could sell, they could sell the remodeled home and downsize to another home on the land holdings and they stated they have savings. They could even buy insurance to cover the payment of the home if they were to become disabled. Where is the risk? As I see it they would be increasing the worth of the place and eventually the place may be sold to finance retirement and the appreciation on the added floor space would be a nice investment. The added value could also contribute to an nice inheritance for their heirs. Meanwhile, they could enjoy the fruits of their labor and have what they want. Debt is not bad, the inability to manage debt is a killer.


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## FarmerGreen (Dec 11, 2007)

agmantoo said:


> I have a difficult time understanding about 99% of the people on the site and their attitude toward any risk and any debt. Debt is not bad, the inability to manage debt is a killer.


My attitude on debt comes from here:
Proverbs 22:7 The rich rule the poor, and the borrower is slave to the lender. 

That said, when my granddaughter came to live with us I had to borrow money to build her a bedroom. If I'd had a few more months I would have done it for cash, in stages, and left the bank out of it.


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## Terri (May 10, 2002)

In other words, you can get a whole new mortgage, or cut the house part from the ag exempt, or use the money in the bank to put up a shell to be finished later, or take out a personal loan.

It sounds like you have homework to do!!!!!!!!!


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## Alice In TX/MO (May 10, 2002)

We did have a loan to build our house. Paid it off early.

Had a loan on one of our three vehicles. Paid it off in one year.

We carry NO credit card debt.

With the very strange economic times we are in, I would not finance anything right now unless I was VERY sure of my employment situation.


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## SteveD(TX) (May 14, 2002)

I would never refer to an ag exemption as being a "trap". However, if you have an ag exemption on your property and developers are moving in, you should be aware that any change in use or zoning could result in the dreaded "rollback" taxes that could apply. In other words, you (or someone you sell it to) decide that the land has become too valuable to grow hay or pasture your livestock on it. So, the decision is made to subdivide the land so that people can build houses on it. The land will be subject to taxes equal to the difference in actual taxes paid on it during it's ag exemption status (up to 5 years, I believe), and the taxes that would have been paid had the ag exemption not been there.


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## Driftwood1 (Aug 28, 2008)

Hi again everyone. 
To clarify a few things. I use the word trap , in the sense that when we bought the place, no one told use we wouldnt be able to use any of its equity! The Ag had been in place for years and we wanted horse property. Seemed a perfect match. Indeed we wouldnt likely have paid it down so fast had we known our money would then be tied up. We'd have been better to keep it invested somewhere. Since we intend to retire here, we need the equity since we put all we had into payin off the house! The extra land next door was to go towards our kids college, so paying it off with home equity, turns it into deductable interest, which it isnt, right now. We have no issues with using equity and have done several times before. 
Next. I said 600K home, but its 350K of house and 250 of land. And if you think a 350K house is a palace, you need to look at my neighbor...350 is actually BELOW median for the area. 
Alot of what was said here I totally agree with.. we carry no credit card debt, drive old paid for cars, and watch ourseves ,in general. But it we have equity, we have the chance to improve our home and its net worth, along with our quality of life NOW, instead of perhaps 5 years from now. Life is short! (and we're pretty old) 
We know we can allways sell the adjacent lot to save the house in an emergency, and the way we watch ourselves, even that is extremely unlikely. 
Thanks so much for all your input, and I promise to stick around the board and keep all up to date as to how it goes... that is, if the board cares. 
Cheers


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## 2horses (Jul 19, 2004)

I'm actually toying with the idea of applying for an Ag exemption, so knowing this about the equity is quite interesting. My taxes are pretty high, and it's tempting to use all the livestock on the place (horses and cows) to try and lower it. But I worry about that whole rollback thing - if I decide to downsize in the future, or even sell, it could wind up being a liability. Not everyone that buys property cares to keep up with the requirements for the ag exemption, and that could turn a potential buyer away, as the tax burden (I think?) would fall on them if they failed to keep the ag exempt status. 

That being said, I sure hate paying my property taxes every year. And, my place is already "divided" for tax purposes - the house and one acre is one bill, and the remaining 12.7 acres is a separate (cheaper) one. Given the OP's situation, would I take the exemption on the *unimproved* acreage, and leave the house alone?


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## agmantoo (May 23, 2003)

Where I live the house and its grounds never qualify for the ag exemption. If you are going to own the property longer than the roll back time period you will come out ahead. If you do sell the place jack the price to where the buyer pays the roll back. Without ag exemption I would have to dispose of some of my property. I support anyone attempting to qualify. The best suggestion I can give you is to predetermine what it takes to qualify and then prepare yourselt to meet these stipulations before talking to the tax office. Being prepared goes a long way toward qualifying. At times I have had to put up a strong argument to get the exemption. I always take a copy of the requirements with me and any supporting documents that I may need. Returning a schedule F is the strongest indicator that I am aware of.


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## cindy-e (Feb 14, 2008)

From someone who had a home and lost it because of debt on it (and a LONG period of unemployment - long story won't go into it here)... You are perhaps one of the only people in America right now who is NOT one lost paycheck away from losing your home... PLEASE don't blow it. You are secure in a way that many people will never know. Whatever you wanted to do to the house is NOT worth the debt and the uncertain position you put yourself in by incurring it. PLEASE be patient. In time, you will find another way. Think about it... If the economy goes bad, you have a roof over your head, and a place to grow your own food that can't be taken away. Most of us on this board are working toward getting to where you already are. DON'T blow that! It isn't worth it. Been there. Done that. Wouldn't wish it on my worst enemy.

Cindyc.


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## texican (Oct 4, 2003)

agmantoo...
I have zero problems with going into debt, for the right reasons. If I needed a large loan, I'd go into my local bank, talk to the President, and ask for X. He'll ask which collateral I'd like to put up. I have put my ag exempt land up for collateral. Both the banker and I knew there was zero chance of default, and never had any problems getting a loan, or using the land as collateral. Everyone knows that the low 'value' on ag exempt land doesn't actually translate into the land is worthless... the value rises or falls regardless of the tax status... Maybe OP needs to go to another bank. Don't mention home equity, just ask for a loan, and use your home as collateral, or the land. I think the terms "home equity loan" are starting to scare even the most cautious conservative bankers.

2horses... 
I'd say don't wait, do the ag exemption now! If you decide to sell, you can name your own price, and if someone in the future wants to change the status of the land, it's there's to do. Unless a town is encroaching upon you and there's an industrial park wanting your ranch, there's no reason not to go ag exempt. You got animals, you get the exemption. If they required people to actually make a living off their 'ag exemptions', maybe a handful of people would qualify. The only people I ever heard of losing their ag exemption were people that obviously built a luxury resort on former farmland... 

I thank the good lord that we have ag exemptions... my land is valued at a few hundred dollars an acre, on the tax rolls, because of the tax exemption. (A parcel of land adjoining mine, in worse shape, was recently sold for 5K/acre). My neighbor bought land for 600/acre, and it now goes for 100k (he's developed it for recreation, not ag) And, his tax rate, per acre is around 70K... no difference from one side of the fence to the other, but a huge difference in tax rates.... My land is about 3$/acre, his is 700/acre.


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## Driftwood1 (Aug 28, 2008)

Thanks Texican..
We are being told a "Texas Home Equity Loan" is against the law on Ag exempt property. Period. Sure, we could waltz in to get a regular loan, but the interest would not be tax deductable, and the rate would be higher, and the term would be shorter.. 
Going to see the county today.
I am so glad we caught this now, instead of my kids catching it in 20 years.. 

Lastly, as you all know, we are newbies here, but we are concidering a tree farm on the other lot... any good threads on that here? 
Ceers




texican said:


> agmantoo...
> I have zero problems with going into debt, for the right reasons. If I needed a large loan, I'd go into my local bank, talk to the President, and ask for X. He'll ask which collateral I'd like to put up. I have put my ag exempt land up for collateral. Both the banker and I knew there was zero chance of default, and never had any problems getting a loan, or using the land as collateral. Everyone knows that the low 'value' on ag exempt land doesn't actually translate into the land is worthless... the value rises or falls regardless of the tax status... Maybe OP needs to go to another bank. Don't mention home equity, just ask for a loan, and use your home as collateral, or the land. I think the terms "home equity loan" are starting to scare even the most cautious conservative bankers.
> 
> 2horses...
> ...


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## sammyd (Mar 11, 2007)

I have a few friends that farm and they keep the home and 20 acres seperate from the farm and use that for any loans that they need. Ag loans typically run higher interest and by keeping the home spot off ag they can get cheaper loans.
Next time you want to take advantage of a program you should do a little more research.


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## texican (Oct 4, 2003)

Driftwood1 said:


> Lastly, as you all know, we are newbies here, but we are concidering a tree farm on the other lot... any good threads on that here?
> Ceers


You might actually be planning on having a 'tree farm'... however, unless you love paying a ton of taxes, avoid at all costs every claiming it as a tree farm. The taxes on a tree farm in Texas is 3x other ag type properties... As a matter of fact, a fresh tree farm with one year old pines will be taxed more than an equal sized tract with mature old growth pines.

Avoid planting in 'rows' right next to the highway. And, whatever you do, leave a half dozen or so old hardwoods per acre, especially if the plantation can be seen from the road. And it helps to leave some trees along the creeks, if there are any. A small open area is nice. This way, you can claim it as a mixed forest.

If you do a little research at the county tax assessors office, you'll find most of the 'professionals' pay little taxes on their plantations... if you visit any of the 'pros', you'll see they left small tracts of hardwoods.... so they can qualify for the lesser tax bracket.


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## Driftwood1 (Aug 28, 2008)

Excellent info there Texican.. I will dig into it. 
We really only have post oaks, live oaks, burr Oaks and red oaks ... the rest is cedar and scrub.. as well as open pastures.. 
I had no idea our taxes could go UP for growing a few trees.. 
I am back to the Ag dept on Mon so I will ask around. 
Cheers


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## quietstar (Dec 11, 2002)

As a general rule, I manage my property in Texas just about like Texican suggests. Your problem can be easily solved if you served the country in any branch of the military. The Texas Veterans land board is fat with money to lend on unimproved land and don't nit pick how you spend it much. Current loans are "on or before", up to 30 years with rates about half of other sources...Glen


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## jode (Oct 24, 2007)

A couple quick points, there is no "ag exemption" there are two things that are commonly misnomered :nana: as "ag exemption" those two things are:

1. Agricultural Use Appraisal
2. Open Space Appraisal

The first requires that the *OWNER* receive the majority of their income from ag
The second requires that the *LAND* be used for specific ag purposes.

Neither is an exemption and both are actually just different ways of appraising the land. Take a look here: http://recenter.tamu.edu/pdf/1361.pdf for all the information you may want on this topic.

With that in mind, I think the first thing to do here is to find out what the original poster is currently actually qualified for....if it isn't already too late since this thread is a bit old.


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## Qvrfullmidwife (Jan 10, 2004)

"They tell us we will need to subdivide it.. "

havent you already done this when you have a different tax level for the house vs the ag part?

"Even though the small portion of the land which is homesteaded that the house sits on is NOT Ag exempt"


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## bgraham (Jun 30, 2005)

> I don't know much about Texas, but around here, a $600,000 place is not a homestead, it's a palatial estate.


I'm in Middle TN and even in the cheaper counties, anything over 100 acres with not so much as a single wide on it is a MILLION dollars. If there is a house you are looking at much more.

I have seen 100 acres for 1/2 million but it was all completely wooded, 1/2 of it was a cliff, none of it would perk for a house and it had been logged.


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## Tricky Grama (Oct 7, 2006)

Another tidbit-home equity loans were ALL illegal in TX until just a few yrs ago...well, maybe 10.

Patty


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## morrisfarm (Jun 30, 2008)

Why not use some of the 27 k and build it yourself with cash ?


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## Spinner (Jul 19, 2003)

I finally got my place paid for and there is no way I'd put it in jeopardy in the current economic downturn by borrowing against it. If you can't afford the remodel without putting your home at risk, then you simply can't afford the remodel. 

When you get a home equity loan, you are gambling your secure future. What happens if you can't pay back the loan? Are you willing to trade your home for the remodel? You just might do that if the economy gets worse (I think it will get much worse).


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