Property Taxes
As anyone who has ever balked at a property tax bill can attest, property taxes can be a significant source of revenue.
In fact, property taxes have historically been the largest source of revenue for local governments, and accounted for more than half of revenues for state and local governments before 1945. States have since become less reliant on property taxes, but property taxes remain the dominant source of revenue for local governments. In 2010, 30% of all local government funds came from property tax collections.
There are four categories of property tax: ad valorem, flat, yield, and exemption.
Ad valorem tax is a tax on the fair market value of the a property, where the fair market value is defined as the price a willing, informed buyer would pay a willing, informed seller when neither one is under duress.
Flat taxes levy the same tax per acre regardless of the land’s productivity level. Yield taxes, on the other hand, base the levy on the value of timber at the time of harvest. Yield taxes are often used when the land’s timber is exempt from taxation. And exemptions may exempt forestland from the property tax, or exempt the timber growing on the land.
Why all these different categories? Many states have adjusted their ad valorem tax on woodlands and adopted some of these other property tax categories because ad valorem valuations may not be appropriate for forestry or agricultural land. Fair market value is usually based on the land’s “highest and best use” within the limits of local zoning laws, and that usually assumes the land may be subdivided or developed. But if the land is being used for forestry or farming, it may not be able to support a property tax based on that highest and best use.
To address this problem and help preserve land for agricultural or timber production, many states have adopted some form of preferential tax treatment for forestland. In some states, that means that either the timber or the timber and the land are exempt from ad valorem property tax. For example, Georgia does not levy an ad valorem property tax on the value of timber – that timber is tax-free until the time of harvest, when a payment in lieu of ad valorem taxes is required. In states where timber is exempt, there is often a yield tax levied on the stumpage value at harvest.
Other states have adopted modified assessment laws that permit land to be taxed at a specific ratio or fraction of fair market value, or to lock in a fair market value for a period of time.
The most common approach is to adopt current use valuation. Current use valuation levies a property tax based on the use of the land. This system protects woodland owners near urban areas from the effect of rising property values by taking into account how the land is actually being used. In exchange, the landowners usually must agree to keep using the land for forestry for a set length of time.
There’s one more way that property taxes are often modified for forestry: severance tax. Severance taxes are levied when you harvest your trees. They may be imposed ad valorem, per unit, or in some combination of both methods. This kind of tax is most often levied in addition to some other form of property tax.
As you can see, property taxes can be tricky for woodland owners. It’s best to seek help from a forest-savvy tax professional to make sense of your state and local taxes.
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