County closed tax loophole for 10-acre lots. How that will benefit schools, taxpayers.

The closure of a tax loophole in Fayette County will bring in $1.3 million more in property tax dollars this year to support schools and other public services such as LexTran and the health department.

A 2016 report by the Herald Leader found that property valuation administrators around the state allowed anyone who lived on 10 acres or more to claim an agricultural exemption, whether they farmed the property or not.

The problem was particularly acute in Fayette County, which became honeycombed with 10-acre lots after a wave of development in the 1980s. (By 2000, subdivided property was restricted to 40-acre lots.) But the exemption meant Fayette County lost $11.8 million for schools and other public services in 2015 alone. Statewide, the state Department of Revenue determined that the agriculture exemption lost $98 million in 2017 and 2018, thanks to the break.

After the series appeared, Fayette Property Valuation Administrator David O’Neill promptly closed the loophole, ultimately removing the exemption on 433 properties of roughly 2,200 identified in 2016. Many properties that had been owned for five years or more continue to receive the exemption, but O’Neill expects the number of exemptions to shrink as property is sold and must meet the new rules.

“PVAs always strive for both fair and equitable application of tax laws,”O’Neill said. “Before it was fair, but with many of the 10 acre lots not used for agriculture, it was not equitable. I am glad we have rectified that.”

The vast majority of the revenues go toward the Fayette County Public Schools, although indirectly. The board of education is allowed to capture only a 4 percent increase in property tax revenue from the year before. If the base grows more than 4 percent, the rate stays the same. If not, the board can raise the property tax rate.

The new revenues won’t push the base past 4 percent right away, but it can help, said Fayette Schools spokeswoman Lisa Deffendall.

“Our annual tax rate is based on the total value of the property in the county, so anything that grows the total property tax base benefits all of us in the form of potentially lower tax rates,” she said.

Changing the rules

To close the tax loophole, O’Neill’s office made the following changes:

▪ Anyone wishing to get the agricultural exemption must apply, showing what agriculture is happening or planned on the property. Owners who bought their land before 2013 and have previously received the tax break were grandfathered in and do not have to fill out an application. However, any time property is sold, that status is removed and the new owners will have to apply. That’s why O’Neill has calculated that property tax proceeds will continue to rise in the short term.

▪The definition of 10 acres changed. O’Neill began subtracting on Jan. 1 any acreage used for houses, lawns, swimming pools, driveways and other buildings from the amount of land available for farming, which means many of those lots will no longer meet the 10-acre minimum required to receive the tax break. The house, garages and all other buildings are already taxed at 100 percent of their cash value.

O’Neill said that 296 property owners fought the changes. Of those 188 were reinstated with the exemption, largely because they were part of state and federal farm programs, such as the tobacco buyout, O’Neill said. Another 112 were denied and lost the exemption.

Attorney Darby Turner, who lives on 10 acres on Brookmonte Lane off DeLong Road said he didn’t fight the changes because they didn’t make that much difference to his tax bill. Most of his tax bill comes from his house’s value, regardless of the land.

“It didn’t matter too much because there was always so much value on the house,” he said.

Ketan Patel did appeal the exemption loss for his 10-acre property on Cleveland Road because he owns several horses on the property. Although he won his appeal, he thinks the new rules are a good idea.

“If you’re not using your land for any purpose, that (the exemption) should not be allowed,” he said.

The General Assembly created the farmland preservation tax break in 1969 as a way to protect family farms from rising property taxes as development spread. But the legislature significantly weakened safeguards against abuse of the tax break in 1992 at the request of the Farm Bureau, removing such things as a three-year tax penalty if the land in question was developed and a requirement that land owners provide proof of farming income.

The General Assembly has not passed any new legislation requiring taxpayers to fill out an agriculture application, but county PVAs can ask taxpayers to do so. The Department of Revenue does require that the exemption can only be given to 10-acre properties, once the house, pools and other items have been subtracted from the acreage.

O’Neill said it would be helpful if the General Assembly would still create legislation to better define the meaning of agriculture and better rules for the exemption.

“Just because we weren’t able to get everyone to move in the same direction at the same time didn’t mean I shouldn’t do something and I did and it was the right thing to do,” he said recently.

Woodford PVA Judy Bobbitt said her county doesn’t have many 10-acre lots, but property owners will still have to start filling out an application to receive the break.

Although Jessamine County has vast tracts of suburban development, PVA Brad Freeman said most of those are built on five-acre lots. He has not started asking for applications for the exemption.

In a related note, that’s not the only windfall for the schools and public services. O’’Neill has also calculated that a settlement with Walgreen’s over its property taxes has reaped $867,699 in taxes and interest accrued while the case was going on. In an important test case fought in Fayette County, a Fayette judge upheld O’Neill’s method of valuing such commercial properties. If he had lost, it could have meant millions lost to school districts and other public services across the state.

This story was originally published October 5, 2018 at 9:50 AM.