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After fielding a flurry of questions and concerns from local landlords, Elizabethtown City Council is looking to tighten a rental property tax loophole.
The council on Monday authorized a commission to study ways to ensure a fair environment for all rental property owners.
The existing policy exempts rental income from taxation if the property owner doesn’t manage or own real estate as a primary source of income. A proposed amendment would adapt policy to exempt only those who own four or fewer residential housing units within city limits. Those who own five or more residential rental units within city limits would be considered a business and could be fully taxed by the city.
A housing unit as defined in the proposal is a single living quarters.
Finance Director Steve Park said the exemption was added in 2007 to ensure those who could not sell a home and were renting it or who had moved a loved one into a nursing home and were renting their property would not be taxed.
However, in preparing the exemption, Park said the language of the ordinance was vague and left many landlords unsure if it was applicable to their own circumstance. As a result, Park said, there is a group of rental property owners who pay the tax while others have failed to do so, he said. Park said the city also has found trouble enforcing the policy as written.
“It caused more harm than it did good,” he said.
Park said the new language was proposed to simplify the process and make it clear to property owners what tax obligations they hold.
The council chambers at City Hall were bursting with inquisitive landlords, most of whom were confused by the changes. Some feared it was a new tax against their properties while others thought they could be taxed twice for the same property.
Park and Mayor Tim Walker said the proposal is not a new tax but simply refines language to give the city more power to enforce an existing exemption. No one would be taxed twice and those who are paying the net profits tax of 1.35 percent are in compliance with the law and have no further obligation, the council said.
But Councilman Kenny Lewis said it essentially is a new tax for those who were unaware they were required to pay. He said it comes at a time when the city plans to increase water and sewer rates.
Lewis said landlords will pass those increases on to their tenants in an economically trying time.
But Park and other finance officials said the tax is taken from net profits after a landlord’s expenses are removed so it should not affect revenue in a significant way.
Lewis proposed creating a commission to find the best solution for the community.
Walker asked the council to offer recommendations for committee members by Thursday so it could be assembled quickly. The commission has 30 days to offer a recommendation.
Jeffrey Pitts, a local real estate agent, said the city ultimately will broaden its base and bring in more revenue through the proposal so it should consider lowering the rate.
But Walker said the goal is not to increase tax revenues but create a fair policy for the entire city.
Park said the city has looked at other cities around the state and found many do not offer tax exemptions on rental property. Those that do, he said, are all over the board in execution. For example, some set a threshold of rental income that must be made before it can be taxed, Park said.
Some in the audience pushed for clarity and consistency so property owners and certified public accountants will know what is expected.
Councilman Ron Thomas agreed.
“It needs to be simple and clear,” he said.
Marty Finley can be reached at (270) 505-1762.