"Buying Alabama Land Valued at Current Use: What Does Converting It Cost, and How Far Back Can the County Look?"

The survey stake for the homesite goes in at the top of the rise, where the pasture meets the pines. You can already picture the driveway coming up from the county road. On the Alabama listing, the property tax figure for all twenty-some acres looks almost too small to be right, and for now it is right.

Alabama land valued at current use keeps that lower value only if you apply for it in your own name between October 1 and January 1. If you later convert it to a use that does not qualify, the county figures added taxes for three earlier years, using the higher of your price or market value. Those taxes become a lien on the October 1 after the conversion.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, licensed in fifteen states, including Alabama, NMLS #483943, through C2 Financial Corporation. Current use touches three things I care about on a land purchase: the tax figure a lender qualifies you on, your escrow account, and what your contract says before you sign.

Current use valuation in Alabama

Alabama sorts property into classes for tax purposes, and Class III includes agricultural and forest land along with single-family homes the owner lives in. Normally the county figures the tax on what a property would sell for. For Class III property, an owner can ask the county to value it on its current use instead.

Alabama's current use statute, Ala. Code § 40-7-25.1, defines current use value as the value of the property based on the use being made of it on October 1 of the taxable year. For a pasture or a stand of pines, that means the county looks at what the land is doing as farm or timber land, and gives no weight to what a developer might pay for it.

The Alabama Department of Revenue sets the values the counties use and publishes them each year in a current use directive, with figures for cropland, pasture and timberland by soil group. I am not quoting those figures here, because they change each year and the right one depends on the soil on your parcel. The county assessing official can tell you what the land is valued at today.

Current use does not change the assessment ratio, which is the share of the value the tax is figured on. Farm and forest land in Class III is assessed at 10 percent, the same ratio as a home you own and live in, which I covered in claiming the Alabama homestead exemption after you buy. What current use changes is the value that 10 percent is applied to, and on farm and timber land that difference can be large.

Applying for current use in your own name after you buy

The lower value belongs to the seller's application, and it does not carry over to you. The Department of Revenue says that after a sale, the new owner must apply for current use valuation between October 1 and January 1. If you do not, the county values the land at its fair and reasonable market value.

The Department's current use rule, Ala. Admin. Code r. 810-4-1-.01, says the same thing in its own words: new owners of eligible Class III property must file a timely request to be entitled to current use valuation. The application goes to the county assessing official, on or before January 1.

So if you close on Alabama land in the spring, you will want to put the October to January window on your calendar the day you close. If you close in November, you are already inside that window, and the application can go in right away. Please keep a copy of what you filed and the date you filed it.

The three-year look-back when Alabama land is converted

Converting the land means putting it to a use that does not qualify for current use valuation. When that happens, Alabama's rule asks the county to look back and collect the difference.

The rule covers five things, in this order.

• The notice. The county assessing official has to be notified no later than January 1 in two cases. One is a conversion within two years after a sale of land valued at current use. The other is any conversion of current use land to a use that does not qualify.
• The revaluation. The assessor revalues the land under Ala. Code §§ 40-7-15 and 40-7-25 and figures the additional taxes that would have been due without current use valuation.
• The measure. Those additional taxes are based on the sales price or the fair and reasonable market value at the time of conversion, whichever is greater.
• The look-back. They cover the three years before the tax year that begins on the October 1 following the conversion.
• The lien. They become a lien on that October 1.

The county uses whichever is higher, your price or the market value, so paying less than the land is worth does not lower the bill.

A sale and a conversion within two years of each other are tied together under the rule, and the assessor has to be told about it by January 1. That puts the planning for a homesite, a lot split or any change in how you use the land right at the start of your ownership, which is also when you are setting up the mortgage.

The look-back and your purchase contract

Because the added taxes become a lien on the land on October 1, the bill follows the property. Some of the three years in that look-back may be years the seller owned the land, and some may be yours. The rule sets the measure and the dates. Your purchase contract is where you and the seller decide who pays.

I would want that written down before you sign, in plain terms: who pays if the land is converted after closing, for which years, and whether a credit shows up on the settlement statement. If the seller is splitting a homesite off a larger tract to sell to you, please ask the assessor how that split will be treated before anyone signs the survey for the new lot. It is easiest to settle while everyone is still at the table and the numbers are still being set.

Current use and your mortgage escrow

When I qualify you, I use a property tax figure I can document. On land valued at current use, that is often the current bill, which reflects the seller's current use value. Your escrow account is usually set up from that same figure at closing, and how an escrow account collects taxes and insurance walks through the cushion and the yearly analysis.

Two things can move that figure after you close. If you do not apply for current use in your own name, the land is valued at market value, and the next bill can be much larger than the one you qualified on. If you build, the homesite and the new home come onto the bill at their own value, and the escrow analysis catches up over the following year.

A conversion adds a third item: the one-time bill for the three earlier years. Please ask your servicer before it arrives whether it will pay that bill from escrow or expect you to pay it directly. A one-time bill paid out of the escrow account can leave a shortage that raises your payment for a year.

If you are financing land with a home already on it, buying a home on acreage covers how the appraisal treats the land, the outbuildings, and the well and septic.

Your list before you close on Alabama land

I would work through these with you in this order:

1. You'll want to ask the county assessing official whether the land is valued at current use now, on how many acres, and under which use.
2. Please decide what you plan to do with each part of the land in the first two years, because that plan decides whether the two-year notice and the look-back apply.
3. I would ask your attorney to put the look-back in the contract, including who pays, for which years, and how a credit is handled at closing.
4. You'll want to file your own current use application with the county between October 1 and January 1, and keep a copy with the date.
5. If you convert any of the land, please make sure the assessor is notified by January 1, as the rule requires.
6. Once you build and move in, you can claim the homestead exemption on the homesite at the same county office.

An example with made-up numbers

The numbers and dates below are made up to show how the rule works. This is not a real property, a real bill or an estimate for any Alabama county.

You buy forty acres of pine timberland in March. The land is valued at current use, and you file your own application that December. Eighteen months after closing, you clear two acres and build a home. That is a conversion within two years of the sale, so the assessor needs to be notified by the January 1 that follows.

Say the tax on those two acres at current use was $9 a year, and the tax figured on the greater of your price or market value would have been $260 a year. The added taxes are the difference for each of the three years in the look-back:

Tax at market value, per year        $260
Tax at current use, per year         - $9
                                     -----
Difference per year                   $251
Years in the look-back                 x 3
                                     -----
Added taxes                           $753

In this example, the first year of the look-back ended before you bought the land, and part of the second year was the seller's too. Your contract said the seller would pay the share for the months the seller owned the land, so the bill that becomes a lien on October 1 is one you planned for back in March. The other thirty-eight acres stay valued at current use under your own application, as long as they still qualify.

Next steps

Alabama has more going on at a closing than current use. It taxes both the deed and the mortgage when they are recorded, and the Alabama mortgage page covers both taxes and who closes the loan. If you are comparing land in more than one state, the same family of rules works differently next door: South Carolina's agricultural rollback tax and Georgia's conservation use covenant each have their own dates and their own look-back.

When the land plan is settled, the next step is the financing. If you'd like to see rates for your scenario and your closing costs first, with no credit pull and no account, you can explore your numbers here. When you are ready, you can get pre-approved for an Alabama mortgage, and I will review your income, debts and credit, so the tax figure we qualify you on matches the land you are buying.

Nothing here is a loan approval, a denial, a commitment to lend, or legal or tax advice. Current use eligibility, values and conversion decisions belong to your county's assessing official, and current forms and deadlines belong to that office.

Common questions

Does current use valuation transfer to a new owner in Alabama?

No, it does not. After a sale or any other transfer of the land, the Alabama Department of Revenue says the new owner must apply for current use valuation between October 1 and January 1. If the new owner does not apply, the land is valued at its fair and reasonable market value. The Department's rule, Ala. Admin. Code r. 810-4-1-.01, says new owners of eligible Class III property must file a timely request to be entitled to it. The application goes to the county assessing official.

How many years can Alabama look back when current use land is converted?

Three. Under Ala. Admin. Code r. 810-4-1-.01, the additional taxes cover the three-year period before the tax year that begins on the October 1 following the conversion. They are figured as the taxes that would have been due without current use valuation, and they become a lien on that October 1.

How does Alabama figure the rollback taxes on converted current use land?

In Alabama, the rollback is the three-year look-back, and the rule calls those taxes additional taxes. The county assessing official revalues the land under Ala. Code §§ 40-7-15 and 40-7-25 and figures the additional taxes that would have been due without current use valuation. The measure is the sales price of the property or its fair and reasonable market value at the time of conversion, whichever is greater. A bargain price does not lower the bill, because market value is used when it is higher.

When do I have to tell the Alabama tax assessor that I converted current use land?

No later than January 1. The rule requires that notice in two cases. One is when land valued at current use is sold and then converted to a use that does not qualify within two years of the sale. The other is when current use land is converted to a use that does not qualify. The notice goes to the county assessing official where the land is located.

What date decides the current use of Alabama land each year?

October 1. Ala. Code § 40-7-25.1 defines current use value as the value of eligible property based on the use being made of it on October 1 of the taxable year. October 1 is also when the additional taxes from a conversion become a lien, on the October 1 that follows the conversion.

Who pays the Alabama rollback taxes when land is sold?

The rule sets the dates and the measure, and the added taxes become a lien on the land on October 1, so the bill follows the property. Between you and the seller, your purchase contract decides who pays, for which years, and whether a credit appears on the settlement statement. It is worth settling in writing before you sign, especially if you plan to build within two years of closing.