Iowa Court Affirms that Hobby Farm Property Should be Classified as Residential

On April 29, 2020, the Iowa Court of Appeals affirmed a district court’s ruling finding a classification of property to be residential rather than agricultural. The court found the primary use of the property was not agricultural and the property owner did not have a genuine intention to profit.  

Background

The plaintiff in this case purchased 10.2 acres in 2008. The plaintiff used two acres of the land as the homestead, left about five acres of a slough undeveloped, and used 3.6 acres as cropland. Beginning in 2009, he grew various crops including hay, corn, and pumpkins. One year, he did not grow any crops due to weather conditions.

The plaintiff appealed tax assessments for the years 2013, 2015, and—the assessment at issue—2017. For a third time, the plaintiff petitioned the county board of review claiming the county assessor misclassified the land as residential rather than agricultural. The board denied the petition and the plaintiff appealed directly to the district court. The Court of Appeals affirmed a prior appeal of the taxpayer’s 2015 assessment in August of 2019.

At trial, the county assessor testified that while agricultural activities did take place on the property, this was not the primary use. The district court found the plaintiff to be “a hobby farmer” and the proper classification to be residential. The plaintiff appealed.

Property Tax Classification

To determine the amount of property taxes owed, the county assessor will determine the classification of a property. The classification is to be determined by the property’s primary use. Once the classification of a property has been adjudicated, there is a presumption the classification is unchanged for four subsequent assessment years unless another adjudication finds there is a change in use of the property. Iowa Code § 441.21(3)(b)(3). This is known as the continuity of use presumption.

Agricultural real estate is defined as land and buildings which are used in good faith primarily for agricultural purposes. Agricultural purpose includes growing crops and fruit trees, and raising livestock for profit. However, agricultural land does not include residential buildings with a primary use of human habitation. Assessors may not classify property according to its highest and best use, but must classify the property according to its present use. Iowa Admin. Code r. 701-71.1(1).

Primary Use of Property

On review, the Iowa Court of Appeals affirmed the district court’s decision, ruling that the land was properly classified as residential.

With limited exceptions, a property can only receive one classification. In this case, the previous two property tax assessments classified the plaintiff’s property as residential. The taxpayer asserted the land should be classified as agricultural and that he overcame the continuity of use presumption.

Setting aside the slough land, the court considered whether the taxpayer “in good faith” used the remaining 5.3 acres primarily for agricultural purposes. Of that, the plaintiff used 3.6 acres for farming activities. Here, while agricultural activities were taking place the court had to determine whether that was the property’s primary use.

In its decision, the court cited to Colvin v. Story County Board of Review, 653 N.W.2d 345, 350 (Iowa 2002) and stated that a county assessor in determining whether real estate is primarily agricultural may be guided by five questions:

• Is the parcel set off and awaiting development?
• What permitted uses does current zoning allow?
• If the parcel is being offered for sale, or if it were, would it be viewed by the marketplace as other than agricultural?
• How does the land conform to other surrounding properties
• What is the actual amount of income produced and from what sources; and
• What is the highest and best use of the property?

In light of the Iowa Administrative Code prohibiting an assessor from determining the “highest and best use” of a property, it could be the court was referencing only the first five of the six factors it listed. Footnote three of the Colvin case stated, “Colvins challenge the county assessor's use of these factors in 1999 asserting they are not within the contemplation of Iowa Administrative rule 701-71.1(1). We do not reach this issue because Colvins did not appeal the 1999 assessment to our court.” The Iowa Court of Appeals previously affirmed a Property Assessment Appeal decision considering but declining to rely solely on these factors. Polk County Bd. of Review v. Property Assessment Appeal Bd., No. 09-1542 at *5 (Iowa Ct. App. Aug. 11, 2010). 

The court noted that the district court found the property never profited from its agricultural endeavors and if the land was sold it would be sold as residential property. Additionally, the court noted that the property is surrounded by other residential property and the best use of the property is residential. The plaintiff did not offer any additional evidence before the lower court to overcome the presumption that the proper classification of the property was residential.

Intent to Profit

The plaintiff claimed he continued to change and improve productivity on the 3.6 acres. He sought mentorship from other farmers in the area and built a barn to store crops. The plaintiff claimed the past adjudications finding the property to be residential “unfairly assumed the term ‘intended profit’ in the administrative code definition correlates with the ‘bottom line on his Schedule F’ for federal income tax purposes.”

An agricultural operation does not need to actually make a profit, but there must be a good faith intent to profit. The taxpayer’s main form of profit from the farming operation was through tax savings. The farm at most cleared $1,200 a year. The court found the taxpayer failed to show a genuine intent to profit.  Because of this, the Court of Appeals affirmed the proper classification of the property to be residential.