Direct farm businesses must pay local property taxes each year on real property owned by the business.  If a farmer leases land from an owner who is otherwise exempt from paying property taxes (e.g., a governmental entity), the farmer must pay property taxes on the land.

Property taxation in Illinois is governed by the Illinois Property Tax Code.  Real property is typically assessed at 33 1/3% of fair market value, and is calculated in two-year cycles. 

Farmland, however, is exempt from the typical process of property tax assessment.  The assessed value of farmland is not based on fair market value.  Instead, farmland is valued using an "agricultural economic value" or "use value."  Computation of this value is complex (see below).  In sum, the value is based on statewide studies of land use under average management, soil productivity (a rating assigned to each soil type based on its ability to produce crops), and net income of farms in Illinois. 

The application of the use value (through the equalized assessed value) depends on the type of farmland the direct farm business owns.  Crops¹ are assessed at the equalized assessed value.  Permanent pasture is assessed at 1/3 the rate it would be assessed if it were planted in crops.  Other farmland is assessed at 1/6 the rate it would be assessed if it were planted in crops.  Wasteland has no assessed value unless it contributes to the productivity of the farm.Direct farm businesses that grow crops other than commodity

On May 1 of each year, the Department of Revenue certifies certain values to the chief county assessment officer that will aid in each individual farmland's property tax assessment.  The state Farmland Technical Advisory Board, whose 5 members are appointed by the Director of the Department of revenue and are drawn from Illinois schools or college of agriculture and state and federal agricultural agencies, provide advice, data and technical assistance to the Department of Revenue for determining these values.  These values are on a per acre basis by soil productivity index, and are taken from moving averages for the most recent 5-year period for which data is available. 

The values submitted to the county include:

• The proposed agricultural economic value.  This value is calculated by taking the net return to land divided by the moving average of the Federal Land Bank farmland mortgage interest rate as calculated by the Department of Revenue.  Net return to land is calculated as the difference between gross income and capitalized production costs.  Gross income is based on yields per acre as assigned to soil productivity indices, the crop mix for each soil productivity index, and average prices received for various types of crops.  Production costs (other than land costs) are determined by the University of Illinois College of Agriculture. 
• The equalized assessed value of per acre of farmland for each soil productivity index, which is 33 1/3% of the agricultural economic value.  The assessed value per acre by soil productivity index cannot increase by more than 10% from the preceding year's soil productivity index certified assessed value.
• A proposed average equalized assessed value per acre of cropland for each county, weighted by the distribution of soils by productivity index for that county.
• A proposed average equalized assessed value per acre for all farmland in the county, weighted (a) to consider the proportion of all farmland acres in the county which are cropland, permanent pasture and other cropland, and (b) to reflect the valuations for those types of land and debasements for slope and erosion.

The county assessor notes each of the farm's land use categories and takes the equalized assessed value for each soil productivity index to arrive at the farm's assessed value.  The sections of the Illinois Property Tax Code that govern this process can be found here.  Farmland assessment review procedures are contained in Department of Revenue regulations.

To be assessed at the farmland level, the property must meet the legal definition of "farm" for the previous two years.  The code defines "farm" as:

any property used solely for the growing and harvesting of crops; for the feeding, breeding and management of livestock; for dairying or for any other agricultural or horticultural use or combination thereof; including, but not limited to, hay, grain, fruit, truck or vegetable crops, floriculture, mushroom growing, plant or tree nurseries, orchards, forestry, sod farming and greenhouses; and the keeping, raising and feeding of livestock or poultry, including dairying, poultry, swine, sheep, beef cattle, ponies or horses, fur farming, bees, fish and wildlife farming.

The term "farm" does not include property that is primarily used for residential purposes even though some farm products may be grown or farm animals are bred or fed on the property incidental to its primary use.

Farm dwellings and parcels of property on which farm dwellings are immediately situated are assessed as part of the farm, but are assessed using the fair market value instead of the agricultural economic value (the assessed value is 33 1/3% of fair market value).

Improvements are assessed as part of the farm when such buildings contribute in whole or in part to the operation of the farm.  Specifically, farm buildings are assessed at 33 1/3% of the value of the building's contribution to the farm's productivity. 

The IL Department of Revenue has published a guide to local property taxation, which includes useful definitions, information on how farmland value is assessed, including how the DOR and the county arrive at the economic value of farmland, and the procedure for assessing farmland.

¹ The definition of "crop" appears to include both the growing of commodity crops and specialty crops, although the soil productivity index used in calculating the agricultural use value is calculated only for commodity crops.  The statute (35 ILCS 200/10-25) defines "crop" as the definition set by the U.S. Census Bureau (which would now be by the Department of Agriculture's National Agricultural Statistics Service (NASS), the department that conducts the agricultural census every 5 years).  NASS classifies crop production using the North American Industry Classification System (NAICS), which includes under "crops" the growing of specialty crops. 

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