Pennsylvania has eliminated the state tax on the inheritance of agricultural real estate provided certain conditions are met. Previously, agricultural real estate which passed to grown children and other non-spouse relatives was taxed at rates of 4.5% to 15%.
Pennsylvania's inheritance tax rates are as follows:
- 0 percent on transfers to a surviving spouse or to a parent from a child aged 21 or younger;
- 4.5 percent on transfers to direct descendants and lineal heirs;
- 12 percent on transfers to siblings; and
- 15 percent on transfers to other heirs, except charitable organizations, exempt institutions and government entities exempt from tax.
(1) The real estate must continue to be devoted to agriculture for a period of 7 years;
(2) The real estate must derive a yearly gross income of at least $2,000;
(3) The property is inherited by members of the same family which is broadly defined to include the decedent and his or her parents, lineal descendants such as children and grandchildren, brothers and sisters, aunts and uncles, some cousins, and the spouses and estates of any of them. Individuals related by the half blood or legal adoption are treated as if they were related by the whole blood.
In addition, a transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve, as those terms are defined in section 2122(a), to lineal descendants or siblings is exempt from inheritance tax. (Section 2122(a) is reproduced below).
If the property is no longer devoted to the business of agriculture for 7 years beyond the transferor's date of death it becomes subject to the inheritance tax.
Here is the exact wording of the new law:
Section 2111. Transfers Not Subject to Tax. * * *
(s) A transfer of real estate devoted to the business of agriculture between members of the same family, provided that after the transfer the real estate continues to be devoted to the business of agriculture for a period of seven years beyond the transferor's date of death and the real estate derives a yearly gross income of at least two thousand dollars ($2,000), provided that:
(1) Any tract of land under this article which is no longer devoted to the business of agriculture within seven years beyond the transferor's date of death shall be subject to inheritance tax due the Commonwealth under section 2107, in the amount that would have been paid or payable on the basis of valuation authorized under section 2121 for nonexempt transfers of property, plus interest thereon accruing as of the transferor's date of death, at the rate established in section 2143.
(2) Any tax imposed under section 2107 shall be a lien in favor of the Commonwealth upon the property no longer being devoted to agricultural use, collectible in the manner provided for by law for the collection of delinquent real estate taxes, as well as the personal obligation of the owner of the property at the time of the change of use.
(3) Every owner of real estate exempt under this subsection shall certify to the department on an annual basis that the land qualifies for this exemption and shall notify the department within thirty days of any transaction or occurrence causing the real estate to fail to qualify for the exemption. Each year the department shall inform all owners of their obligation to provide an annual certification under this subclause. This certification and notification shall be completed in the form and manner as provided by the department.
(s.1) A transfer of an agricultural commodity, agricultural conservation easement, agricultural reserve, agricultural use property or a forest reserve, as those terms are defined in section 2122(a), to lineal descendants or siblings is exempt from inheritance tax.
Here are some relevant definitions:
"Members of the same family." Any individual, such individual's brothers and sisters, the brothers and sisters of such individual's parents and grandparents, the ancestors and lineal descendents of any of the foregoing, a spouse of any of the foregoing and the estate of any of the foregoing. Individuals related by the half blood or legal adoption shall be treated as if they were related by the whole blood.
"Business of agriculture." The term shall include the leasing to members of the same family or the leasing to a corporation or association owned by members of the same family of property which is directly and principally used for agricultural purposes. The business of agriculture shall not be deemed to include:
(1) recreational activities such as, but not limited to, hunting, fishing, camping, skiing, show competition or racing;
(2) the raising, breeding or training of game animals or game birds, fish, cats, dogs or pets or animals intended for use in sporting or recreational activities;
(3) fur farming;
(4) stockyard and slaughterhouse operations; or
(5) manufacturing or processing operations of any kind.
Section 2122(a) [72 P.S. § 9122] contains the following definitions
72 P.S. § 9122. Valuation of Certain Farmland (a) The following words and phrases, when used in this section, shall have the meaning ascribed to them in this section, except where the context clearly indicates a different meaning:
"AGRICULTURAL COMMODITY." Any and all plant and animal products, including Christmas trees produced in this Commonwealth for commercial purposes.
"AGRICULTURAL CONSERVATION EASEMENT." As defined in section 3 of the act of June 30, 1981 (P.L. 128, No. 43), known as the "Agricultural Area Security Law."
"AGRICULTURAL RESERVE." Noncommercial open space lands used for outdoor recreation or the enjoyment of scenic or natural beauty and open to the public for such use, without charge or fee, on a nondiscriminatory basis.
"AGRICULTURAL USE." Use of the land for the purpose of producing an agricultural commodity or when devoted to and meeting the requirements and qualifications for payments or other compensation pursuant to a soil conservation program under an agreement with an agency of the Federal Government.
"FOREST RESERVE." Land, ten acres or more, stocked by forest trees of any size and capable of producing timber or other wood products.