Corridor Notes · Incentives & Tax
The Lexington occupational license fee is usually talked about as a payroll tax, 2.25% of wages. Fewer people realize it also reaches rental income from commercial property. Whether yours is in depends on one threshold and on how the deed is titled, and the rule most owners miss is about the day they sell.
Does Lexington’s occupational license fee apply to commercial rental income?
Yes, for most owners. A corporation or partnership that owns rental property owes it at any rent level. An individual owes it once Fayette County gross rents reach $50,000 a year.
The Lexington-Fayette Urban County Government sets the occupational license fee at 2.25% of an individual’s compensation and a business’s net profits. The part that matters to a landlord is in the city’s 2025 Form 228 Net Profits License Fee Return instructions, published January 2026. They say that corporations, partnerships and other associations with business activity in the urban county that receive income “from the rental, ownership or management of real property, wherever located, are in the business of renting said property, regardless of the amount of gross rental income.”
So an entity-owned building has no small-landlord exemption. Every $10,000 of net profit apportioned to Fayette County carries $225 of license fee at the 2.25% rate. That profit is figured after expenses, not on gross rent.
What is the $50,000 test for individual landlords?
An individual’s rental property counts as a business activity only when their Fayette County rentals produce gross rents of $50,000 or more a year. Below that line they file for an exemption instead of paying.
The same Form 228 instructions spell out three details that change who passes the test:
- It measures gross rents, not profit. A building that loses money on paper can still cross $50,000 in gross receipts.
- A married couple gets one test, not two. The instructions say that spouses filing jointly for federal purposes are “limited to one $50,000 test” however the Schedule E amounts are split.
- Short-term rental income counts. The minimum-fee exemption applies to sole proprietors whose “rental gross receipts, including short-term rental income, are less than $50,000.” Short-term rentals also need their own special fees license, according to the LFUCG Division of Revenue.
Staying under the line does not mean skipping the paperwork. The instructions say you “must file a return to qualify for the exemption” by checking the Minimum License Fee Exemption box and attaching your federal schedules.
How does holding the building in an LLC change the answer?
It depends on how the LLC is taxed. A single-member LLC filing as a sole proprietor is treated as an individual and gets the $50,000 test. A multi-member LLC taxed as a partnership does not.
The Form 228 instructions say that “single member LLC’s filing as sole proprietors for federal tax purposes are individuals for purposes of this test,” and that LLCs “have the same entity classification as that elected” federally. Under the IRS rules for single-member LLCs, a one-owner LLC is disregarded as separate from its owner by default unless it elects to be taxed as a corporation. For the city’s rental test, that default is what puts it in the individual column.
| How the rental property is held | In the “business of renting” for the Lexington fee? |
|---|---|
| Individual, or married couple filing jointly | Only if Fayette County gross rents are $50,000 or more a year (one test per joint return) |
| Single-member LLC filing as a sole proprietor | Treated as an individual, so the same $50,000 test applies |
| Multi-member LLC or partnership | Yes, regardless of the amount of gross rental income |
| Corporation (C or S) | Yes, regardless of the amount of gross rental income |
A buyer choosing how to title a building should put this line next to the liability and lending questions. It is a real cost, but it is a small one and it should not decide the structure alone. That call belongs to your CPA and attorney.
Is the gain on selling the building subject to the fee?
For an owner in the business of renting, yes. The city’s instructions require capital gain from selling real property used in that rental business to be included in net profits.
The Form 228 instructions state: “Licensees shall include in net profits any capital gain arising from the sale of any real property included in the licensee’s business of renting real property.” They also set a presumption for individuals. An individual’s property “is presumed to be included in the licensee’s business of renting property if the licensee met the ‘business activity’ test referenced above in the current or previous tax year.”
The license fee a Lexington landlord forgets is not on the rent. It is on the sale.
That presumption looks back a year. An owner who crossed $50,000 in gross rents last year and sells this year starts from the presumption that the building was part of a rental business. A seller who is counting net proceeds from a closing statement should ask their tax preparer about this line before accepting an offer, not after. For the closing-day costs that do appear on the settlement statement, see Fayette County deed recording fees and transfer tax.
When is the return due, and what does filing late cost?
For calendar-year filers, Form 228 is due April 15. The city charges 5% a month in penalties, capped at 25%, plus interest and a $25 minimum penalty.
The instructions set the due date as the fifteenth day of the fourth month after the fiscal year closes: April 15, 2026 for the 2025 calendar year. The city’s 2026 due-date schedule lists April 15, 2027 for a fiscal year ending December 31, 2026, with an extended date of October 15, 2027. The costs that matter, per the instructions:
- Extension: Form 228 EXT or federal Form 4868 or 7004, received by the original due date with the estimated fee paid. The extension moves the filing date, not the payment date. Any unpaid balance after the regular due date “bears interest at the rate of twelve percent (12%) per annum.”
- Late filing or payment: 5% per month or fraction of a month, up to 25% of the liability, plus a $25 minimum penalty under KRS 67.790.
- Quarterly estimates: required of taxpayers other than sole proprietors “who may have a total tax obligation above $5,000.00 in any tax year.”
- Minimum fee: the LFUCG minimum license and filing requirements page lists a $100 initial license fee and a $100 annual minimum.
What should a buyer ask before closing on a Lexington investment property?
Ask how the seller has been filing Form 228, and decide how you will hold title. The answers change your net-profit math and the filings you owe from the first rent check.
In my practice, the ownership-structure conversation tends to come too late, often after the lender or the title company has already asked for the name of the buying entity. I would rather raise it while we are still modeling the building. The occupational license fee is one line in that model, next to Fayette County commercial property tax. It is easy to leave out of a pro forma because it never appears on a listing sheet or a rent roll. For how the rest of the model fits together, see investment property in Lexington, KY.
Owners who turned 65 or older and file as sole proprietors get a small break. The instructions allow them to deduct $3,000 before the rate is applied.
Frequently asked questions
I own one small commercial building in my own name. Do I owe the Lexington fee?
Only if your Fayette County gross rents are $50,000 or more for the year, measured once per joint federal return. Below that, the city’s instructions say you still file Form 228 and check the Minimum License Fee Exemption box to claim the exemption.
Does the fee apply to gross rent or to profit?
To net profit. The $50,000 test uses gross rents to decide whether an individual is in business, but the 2.25% rate is applied to net profit apportioned to Fayette County.
Does a multi-member LLC that owns one building have to file?
Yes. The instructions treat partnerships and other associations that receive income from renting real property as being in the business of renting, whatever the amount of gross rental income. An LLC is classified the way it is classified for federal tax purposes.
Last updated: September 19, 2026.
By Marcos Gil, REALTOR® — Keller Williams Commonwealth · KY Real Estate License No. 296259 · Call or text (859) 310-1209.
This article is general information about a local license fee, not tax, legal or accounting advice. Rates, thresholds and forms change each year. Confirm your filing obligations with the LFUCG Division of Revenue at (859) 280-8300 and with your CPA.
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