More from the series
Harvesting Tax Breaks
How tax relief intended to save Kentucky farms helps pave them instead.
Ed Hastie grew up on a farm in Montgomery County and always wanted to live in the country. But he became a lawyer, not a farmer, so in 1978, he and his wife bought a 10-acre lot in southern Fayette County.
“My purpose was to be able to build a home in the country,” he said. “I have no interest whatsoever in raising a crop.”
Nonetheless, Hastie’s $466,000 property on Ashley Woods Road gets a tax exemption designed to preserve working farms, cutting the taxable value of his land by $194,500 last year and his tax bill to $2,425.06. Hastie gets the tax break because any property of 10 acres or more in Fayette County that is capable of being farmed automatically qualifies, regardless of how the land is used.
That means millions of tax dollars that could be used for schools and libraries are being forfeited to preserve land that might never be farmed again.
Although horses roam, cattle graze and soybeans grow on much of the 116,753 acres in Fayette County that are classified as “agricultural” and taxed at a lower rate, plenty more have nothing to do with what state law says comprises agriculture — the production of livestock and crops.
In 2012, the U.S. Department of Agriculture recognized 718 working farms in Fayette County, but 2,459 properties get the farmland preservation tax break. Of those, 841 parcels are between 10 and 11 acres. Thanks to previous zoning rules that allowed 10-acre lot subdividing of formerly rural land, the county is honeycombed with such properties, many of which feature large houses and pools. Some have a few horses or a cornfield, but many have 10 acres of lawn.
The houses on those properties are fully taxed at fair cash value, but the surrounding acreage is considered farmland, saving homeowners between 10 percent and 40 percent off their total property tax bills.
According to a Herald-Leader analysis of Fayette PVA data, the farmland preservation tax break reduces the taxable value of parcels of 10 to 11 acres by a cumulative $183 million. If that property were taxed at its full cash value, Fayette County Public Schools would get about $1.4 million more each year.
Such an influx in new property taxes might trigger a state law that prevents a school district’s property tax revenue from increasing by more than 4 percent each year. If that happened, tax rates might be lowered for everyone, including suburban homeowners who pay full freight.
“We appreciate the Lexington Herald-Leader looking into the way that the agricultural property tax exemption has been implemented in Fayette County,” Fayette County Schools Superintendent Mannny Caulk said. “It is always advisable to revisit current practice from time to time to check for fairness and consistency. As we consider the process being followed now in our community, the central question should be whether this exemption is being applied in a way that is fair to all property owners. We would be very interested in exploring whether a change in the process would allow for a reduction in property tax rates across the board for all taxpayers in our community.”
Brad Hughes of the Kentucky School Boards Association said many school board members across the state also would be interested in knowing whether the tax exemption is properly applied.
“Right now, school boards across the state are being put in the position of either having to raise local taxes or chip away at some part of the educational foundation,” he said. “I could see a lot of boards being interested in how they don’t tax these folks. School boards want to tax everyone equally.”
‘What does it mean?’
Many taxpayers know nothing of the farmland preservation tax break, including the people who receive it.
Take the palatial 8,000-square-foot mansion on Delong Road owned by Elizabeth and David Duzyk, a New York financier and former J. P. Morgan executive. The property, nestled in a sweeping lawn, has a fair cash value of $3.5 million, but about 10 percent of that value — $342,600 — is erased by the agriculture tax break, reducing the property’s annual tax bill to $31,985.
Elizabeth Duzyk said that in eight years of living there, she didn’t realize that the couple received a tax break meant to preserve working farms.
“No, because we’re not really agricultural,” she said. “Because we’ve never lived on 10 acres before, we didn’t have anything to compare it to. I think if we were truly in the farming business, we’d be more knowledgeable.”
Property valuation administrators in some counties require landowners to file paperwork proving their land is used to produce agriculture. But Fayette County PVA David O’Neill said his office automatically provides the tax break to properties of 10 acres or more, on the advice of Fayette County Attorney Larry Roberts. Roberts said it’s clear that the exemption is being abused, but tax appeals boards and courts have interpreted the loosely written law in such a way that having 10 acres or more of land capable of agricultural production is the only requirement for receiving the tax break.
In addition, O’Neill said, it would be difficult to define and monitor agriculture production across the county. Before 1992, landowners were required by law to prove that their land produced income from farming before receiving the tax break, but that part of the law was removed by the General Assembly.
“What does it mean?” O’Neill asked, referring to the definition of agriculture. “How many tomato plants does it take? How many times do I have to set up a booth at Farmers Market before I qualify for producing agriculture? So those are the types of questions that I think have gotten us to where we are today.”
Lure of a lower tax
O’Neill contends that the tax break also supports Fayette County’s reverence for green space.
“I think that one of the things that goes directly to the nature of what makes Central Kentucky special, the Bluegrass, is farmland. We value keeping large tracts of land together,” he said in a recent interview. “Through zoning, and urban service boundaries, we landed at 10 acres, and that seems to me to be reasonable — that anything of 10 acres or more we’re going to offer incentives to keep whole.”
That argument, however, was upended in 1999, when Fayette County’s elected officials decided that 10-acre lots destroyed too much farmland. The planning commission, and then the city council, voted to change the minimum for subdivided plots from 10 acres to 40 in rural portions of the county. In 2000, Lexington enacted the Purchase of Development Rights program, which is designed to preserve farmland by paying landowners for easements that prohibit development.
“The agricultural community decided you really needed to have 40 acres to have viable agricultural operations,” said Knox Von Nagell, former director of the Fayette Alliance, which promotes sustainable growth to protect green space. “They decided the 10-acre lots were ‘too big to mow, too small to grow,’ so there was a policy decision that we protect the factory floor for active agriculture.”
Von Nagell added: “The 10-acre estate lots were eating up a lot of prime, finite Bluegrass farmland to accommodate low-density residential development.”
Lexington’s move to larger rural lots pushed a lot of low-density residential development to neighboring counties, where PVAs also give automatic agriculture tax breaks to lots of 10 acres or more.
Jessamine County PVA Brad Freeman said changing the rules for farmland preservation tax breaks might bring political difficulties for PVAs.
“If you took someone’s ag exemption away, I’d expect you’d see a lot of people in the PVA’s office,” Freeman said.
Keith Yarber, for example, said the agriculture tax break on his 10-acre lot on Clear Lake Drive is deserved because he allows a farmer to harvest six acres of hay around his house a couple times a year. The farmer gets the hay in exchange for cutting it, and the taxable value of Yarber’s property is reduced by $152,500 a year to $502,500. His property tax bill last year was $5,090.45.
“I certainly don’t want them taking it (the tax break) away,” said Yarber, CEO of the publication Tops in Lex.
O’Neill also said homebuyers are lured by the lower tax bills that come with agriculture tax exemptions, and that boosts overall property values. However, Whitney Pannell, a realtor with Keller Williams in Lexington, said no one has ever mentioned the agricultural exemption in her 22 years of selling million-dollar properties, many of which automatically receive the exemption.
“I’ve never had one client mention it,” she said. “I would venture to say it doesn’t make a hill of beans difference to people.”
Charles Sachatello, a retired University of Kentucky physician, has lived on Brookmonte Lane for 16 years.
“I did not know about the exemption,” Sachatello said. “I only learned about it the past few years.”
Since then, he has planted a grove of walnut trees as an investment on his 10-acre property, which is valued at $1.4 million.
Nearly all the lots on Brookmonte feature million-dollar mansions, pools and lawns. Four of them have small horse stables. The homeowners, who include former UK and NFL quarterback Tim Couch, get a cumulative tax exemption of $2.5 million, including $214,500 for Sachatello. His property tax bill last year was $11,350.
Not everyone in the state thinks taxpayers on big lots should get an automatic pass.
Kenton County PVA Darlene Plummer said she treats the agriculture tax exemption the same as a Homestead exemption, which lowers property taxes for those who submit documents showing they are at least 65 years old or disabled.
“We require proof” of agricultural production, Plummer said. “It’s another way in my opinion to do due diligence and make sure land is being used for agricultural purposes.”
Other PVAs, including Jason Scriber of Henry County, would like to see more precise rules.
“Do I agree with it now?” he said. “It’s not the essence of what the ag exemption was intended to be.”
O’Neill said that whether he and Fayette County Attorney Larry Roberts are wrongly interpreting state law and various court decisions dealing with the agriculture exemption, they would like to know.
But verifying that landowners produce agriculture would create more work for his 22-person office.
“It would certainly require more work, and we would do it,” he said.
Some landowners said they would be willing to prove they deserve the exemption.
Greg Harkenrider, a state employee who lives on 10 acres off Military Pike, leases his land to a cattle farmer for grazing. He said he would have no trouble filling out paperwork to prove this agricultural use of his land.
“I think it behooves a normal citizen to make sure their property is properly assessed,” Harkenrider said. “You need to make sure the agricultural exemption goes where it needs to go and does not pull value away from schools. The paperwork requirement makes sense, for government to get the proper revenue and for citizens to get the proper rate.”
Legislative action is needed, said Jason Bailey, executive director of the Kentucky Center for Economic Policy.
“The agricultural exemption is there to protect farmland, not wealthy homeowners,” Bailey said. “These are the kinds of holes in the tax code that we need to be cleaning up. They’re bleeding revenue to our schools and our localities and our states. The legislature should go in and make sure loopholes for wealthy people are closed.”
Part 2 of 3
Monday: Low taxes on 10-acre lawns means others pay more for schools
Tuesday: Dozens of Lexington development properties get farmland tax break