Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q: I live and operate a ranch in Monterey, California. How do I lower my property taxes?
A: Assuming it’s a working ranch, the Williamson Act may help lower property taxes, according to Bradley R. Marsh of the law firm Greenberg Traurig in San Francisco.
"Probably the single most important way to avoid high property taxes involves planning related to California’s Williamson Act," he said. "More than 16 million of the state’s 30 million acres of farm and ranch land are currently protected."
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The California Land Conservation Act of 1965, otherwise known as the Williamson Act, was enacted in Monterey County in 1968, according to the county’s website. Essentially, landowners get a tax discount for agreeing to "restrict their land to agricultural and compatible open-space uses," Mr. Marsh said.
Parcels of land so designated are taxed at a rate that "reflects their actual use rather than potential market value," he said.
To qualify, owners generally must have a minimum of 100 acres of land, with a gross agricultural income of $8,000 per year for three of the last five years, according to the website. Contracts are for 10 years, with the understanding that land will be restricted for agricultural use. The contracts are automatically renewed every year during that time period.
"Some studies have estimated that a Williamson Act agreement saves landowners 20% to 75% of their property tax liability each year," Mr. Marsh said.
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The local board of supervisors would have to approve the designation, according to C. Stephen Davis, also of Greenberg Traurig. The ranch doesn’t necessarily have to be working to qualify, he said, but the land must be for agricultural use only.
California’s property taxes are based on the assessed value of a property when it was purchased, or "base year value," the lawyers said. From then on, increases are capped at 2% annually.
However, that changes when the property changes hands. At that point, it will be reassessed, with the property's current fair market value becoming the base year value. So someone looking to purchase a ranch may find him or herself with a hefty tax bill.
There are some ways to mitigate that, however, according to Mr. Marsh.
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"When looking for a new ranch, it may be possible to purchase the asset using a technique that would avoid a change in ownership of the property," he said. That could be family transfer and legal entity transfer techniques, both of which "are pretty advanced and complex," he said, so it’s best to consult a tax professional.
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