Issue: Tax Reform, Act 1 of 2006

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Act 1 NEWSLETTER
Vol. 1, No. 13, Dec. 18, 2006

IN THIS ISSUE: Reviewing the rules for the farmstead exclusion

SUMMARY: Act 50 of 1999 includes statutory provisions for farmstead exclusions that are incorporated in to Act 1. Because those provisions have not been reviewed recently, an explanation may be in order since districts that provide a homestead exclusion will also have to provide a farmstead exclusion for eligible farmsteads in their district.

The general rules regarding the farmstead exclusion are found in Subchapter F of Act 50 of 1999. Here we find both the definition of "farmstead" and "farmstead property" (§ 8582) and how the farmstead application is applied (§ 8585).

The definition of "farmstead" is "all buildings and structures on a farm not less than 10 contiguous acres in area not otherwise exempt from real property taxation or qualified for any other abatement or exclusion pursuant to any other law, that are used primarily to produce or store any farm product produced on the farm for purposes of commercial agricultural production, to house or confine any animal raised or maintained on the farm for the purpose of commercial agricultural production, to store any agricultural supply to be used on the farm in commercial agricultural production or to store any machinery or equipment used on the farm in commercial agricultural production. This term shall only apply to farms used as the domicile of an owner." The term "farmstead property" is simply defined as a farmstead for which an application for a farmstead exclusion has been submitted and approved by the county assessor's office.

The general rule of application states that any school district that utilizes a homestead exclusion must also grant an exclusion to eligible farmstead property. The amount of the farmstead exclusion is to be a fixed amount, established by the board, not to exceed the amount of the homestead exclusion. PSBA has always construed this requirement to mean that the farmstead exclusion can be for a lesser amount than the homestead exclusion, as long as it is does not exceed the amount of the homestead exclusion. The exclusion for farmstead property is in addition to the homestead exclusion, so it is possible that a single individual can get both exclusions.

ANALYSIS: It is important to note that not all farms will qualify for the farmstead exclusion. The definition sets down several important criteria. The first is that the farm be 10 or more contiguous (adjoining) acres in size, second, that the buildings or structures cannot be exempt from property taxation or qualified for any other abatement or exclusion from property taxes under any other law. This is important because most silos and corn cribs are exempt from property taxes under certain assessment statutes. It was also thought at one point that this criteria might omit any farmstead that contained land given preferential assessment under the "Clean and Green" Act of 1974. It is important to remember, however, that a farmstead exclusion can only be given to buildings and structures while clean and green preferential assessments are given to land. Additionally, the preferential assessment given under the "Clean and Green" program is a "preferential assessment" not a property tax exemption, abatement or exclusion. Therefore, it will be possible for an individual to receive a farmstead exclusion on the buildings and structures on a farm and a clean and green preferential assessment on the land.

The third conclusion is that buildings and structures on a farm must be used for specific purposes, all of which must be used for commercial agricultural purposes. Buildings and structures located on so-called "hobby farms" or "gentleman farms" where the agricultural activity may not be commercial in nature would not qualify. The final conclusion is the farm must be used as the domicile of an owner in order to qualify as a farmstead. Simply said, an owner of the farm must live there in order for it to qualify for the farmstead exclusion.

In conclusion, calculating the size of the homestead and farmstead exclusion can involve more than a simple division of the available revenues among all of the eligible homestead and farmstead property. School boards can be creative with the two exclusions to achieve greater property relief for home owners or choose to keep the two exclusions equal. Either method is acceptable under the law.

QUESTIONS AND ANSWERS

Q: Does the amount of the farmstead exclusion have to appear on either the ballot question or the non-legal interpretative statement?
A: PSBA believes that the farmstead exclusion amount does not have to appear in either place. Section 331.2(e) of Act 1, which lists the three possible forms for the front-end referendum question, makes no mention of listing the farmstead exemption. Each of the three forms listed in sub-paragraphs (i), (ii), and (iii) include a requirement to provide in the question an estimation of the reduction of property taxes on qualified residential properties, however.

Similarly, section 331.2(e)(2), which deals with the non-legal interpretive statement, makes no mention of the farmstead exclusion being a part of what is listed on that document. It does, however, mention that the statement must include the estimated per homestead tax reduction.

While mention of the homestead exclusion amount may not be required in either place, it may be helpful, especially in areas where commercial agriculture is common, to mention on the non-legal interpretative statement that the board has a responsibility to adopt a farmstead exclusion if it utilizes a homestead exclusion. In fact, it may be helpful to mention this fact on other occasions as well, for example at the public hearing on the front-end referendum question and anywhere else where it could serve as an incentive for individuals to vote in favor of the ballot question.

Q: Given the fact that an eligible farmstead must be the domicile of the owner, is it possible for someone to be eligible for a farmstead exclusion but not a homestead exclusion?
A: Probably not. Part of the definition of a homestead, found in section 8401 of Act 50 is "a dwelling used as the domicile of an owner". The key is the inclusion of the terms "domicile" and "owner," both of which are required in the definition of "farmstead."

Q: Is it possible to maintain the amount of a homestead exclusion in a year when the revenues from the Act 1 income tax and/or gaming revenues are lower than the previous year by lowering the farmstead exclusion?
A: Yes, that is one way to accomplish that goal.

Q: What about new buildings on a farm that qualify for the farmstead exclusion?
A: For a building constructed during the taxable year and used as farmstead property, the exclusion must be prorated in a manner consistent with the assessment of real property taxes on that building.

Q: When should the school board set the farmstead exclusion rate?
A: According to Act 1, the rate of homestead exclusion must be set by the school board no later than the last day of the fiscal year immediately preceding the fiscal year in which the exclusion will take place. PSBA believes that the rate of the farmstead exclusion can be set at the same time and that both exclusions can be part of the same resolution. However, if a board should decide to have different rates for each exclusion, it should be sure to keep them separate in the wording of the resolution.

Upcoming Act 1 deadlines:

Dec. 26 - Deadline for PDE to inform school districts about which year's data will be used to determine acceptance of back-end referendum exception applications

Dec. 31 - Deadline for school districts to mail h/f applications. Mailing can be limited to property owners whose property has not yet qualified for an exclusion and to those whose exclusion will expire in 2007

Jan. 25, 2007 - Deadline for school districts to publicly display 2007-08 preliminary budgets. Also deadline for school districts that want to by-pass the preliminary budget process to adopt a resolution that they will not raise the rate of any school tax for 2007-08 above the school district index.