Buying Michigan farm real estate? – Remember Preservation Act 116
If you are buying Michigan farmland and it is enrolled in Preservation Act 116, you may want to check what liability there is on the property.
Farmland Development Rights Agreements are a temporary restriction on the land between the State of Michigan and a landowner, voluntarily entered into by a landowner, preserving their land for agriculture in exchange for certain tax benefits and exemptions for various special assessments, commonly known as Preservation Act (PA) 116.
If you are buying farmland that is enrolled in PA 116 and the contract has not yet expired, the only information recorded on the deed is the fact it is under PA 116. It does not tell you the amount of credits taken which in turn may become a lien on the property. Only the seller and possibly his/her tax advisor may know that. However, once the contract has expired then a lien is recorded at the register of deeds.
For example, you buy farmland that is enrolled in PA 116, and it is in year five of a 10 year contract. The seller received $1,000 per year of credits for a total of $5,000 for the first five years. The buyer must honor the conditions of the contract. You buy the property and farm it for another five years and do not take any PA 116 credits because of high income or by choice. However, after year 10 you decide to sell the property to someone who does not sign-up in PA 116. Then there becomes a $2,000 lien that is due and payable. When PA 116 contracts expire the last seven years of credits taken become a lien on the property. Surprise! In this case you did not take any credits for five years but the previous owner did have $2,000 of credits in this seven year window which now is your liability. Unless the contract had expired you won’t know the amount of liability.
This article does not cover all the ins and outs of PA 116. More information can be found at the MDARD Farmland Preservation website. You may want to call, 517-373-3328, or email the PA 116 program office if you are buying land and want a detailed explanation about possible future liabilities for land in the program.