A lucrative tax break
Houses and other buildings on 10-acre lots must be excluded from the total acreage before an agricultural exemption on property taxes can be given to a homeowner, according to an official legal opinion from the Kentucky Department of Revenue to Fayette County Property Valuation Administrator David O’Neill.
Because properties have to be 10 acres or have five acres in horticultural production to even get the tax break, that means many homeowners in Fayette County and across the state could lose the automatic tax exemption that many PVAs grant to 10-acre lots.
In addition, Department of Revenue attorney Richard Bertelson said in the June 6 letter to O’Neill that the department disagrees with O’Neill’s plan to grandfather in any property owners who already receive the break.
“Therefore, if the agricultural designation is removed from properties which should never have qualified for the agricultural valuation in the first place, due to their failure to meet the 10-acre minimum, ... the property should not be allowed to qualify for the designation going forward, unless sufficient additional acreage is added to the parcel,” the letter says.
O’Neill asked for the opinion after a series of Herald-Leader stories exposed a common practice among PVAs to automatically grant the agricultural exemption to any lots of 10 acres or more. The practice benefits thousands of suburban homes with big lawns but no farm activity.
O’Neill also announced that as of last Jan. 1, anyone who bought lots of 10 acres or more would have to prove that the land was in agricultural use. He also said any new owners would have to exclude dwellings, swimming pools, lawns, drives and flower gardens, as described in the law.
On Tuesday, O’Neill said he needed more clarification on the grandfathering issue.
“I think there are hundreds of property owners in legitimate pursuit of agriculture who will lose their exemption,” according to the opinion, O’Neill said.
“The legislature also needs to step in,” O’Neill said. He also said he thinks the Kentucky PVA Association will make its own recommendations at its annual meeting in Owensboro next week.
The law that gave the agriculture exemption in 1969 was aimed at preserving family farms. But in 1992, the legislature greatly weakened the law by repealing an agriculture income requirement to get the break. They also took out a clawback provision in which any farmer who sold property for development was required to pay two years of taxes at fair market value.
The letter praised O’Neill’s handling of a controversial commercial property, a former farm that received the agricultural exemption even after construction started on an upscale shopping mall. The Summit at Fritz Farm, a shopping center under construction at the corner of Nicholasville Road and Man o’ War Boulevard, was taxed as agricultural land last year even though a development plan was filed with the city in 2013. The property sold for $13 million in June, but only $1,775 in property taxes were paid.
In 2016, the property is assessed at $19 million.
“It is Revenue’s opinion that your office has handled the valuation of that property in precisely the manner required by current law, as work at the development site did not begin until July of 2015,” the letter says.
But from now on, the letter says, a developer might not be able to let former farmland sit fallow until deciding to develop it.
“It would appear that, under KRS 132.450(2)(b), that land in question would continue to qualify for the agricultural or horticultural use valuation as long as the agricultural or horticultural activities on the property are being actively undertaken,” the letter says. “If the land is simply sitting empty and unused, as far as can be objectively discerned from available evidence and observation, then a PVA would be justified in removing the agricultural or horticultural designation of the property pursuant to his authority under KRS and valuing at fair cash value when the classification use begins.”
As to O’Neill’s question about what agricultural use or production really means, the letter said that because there is no statutory definition of those terms, you have to use the dictionary definition.
Bertelson, the Department of Revenue attorney, turned to Webster’s New College Dictionary, which defines “used in production,” as: “to have brought or put into service in the act or process of producing agricultural good to services,” or “to have brought or put into service in the creation of value by producing agricultural goods or services.” That does not mean the use has to create income or profit, the letter states.
That definition does not discern whether a property owner who mows his land for hay qualifies as a farmer, O’Neill said, and that’s why the legislature will have to weigh in at some point.
Rep. Ruth Ann Palumbo failed to pass a bill to address the problem, but she did persuade the Program Review Committee to study the issue before the next legislative session.