On July 2, 2012 Governor Tom Corbett signed House Bill 761, Act 85, into law. This is the same new law that excludes family farms from Pennsylvania inheritance tax when the transfer is to family members and the property is kept in farming for seven years. But that's not all the good news for farmers in this law. Section 9 of the bill broadened the exemption from realty transfer tax for a family farm so that no realty transfer tax need be paid for the transfer of the family farm to additional types of legal entities.
Pennsylvania realty transfer tax is imposed at a rate of 1% on the value of real estate transferred by deed, instrument, long-term lease or other writing. The municipality and school district usually charge 1% between them for a total of 2%. Realty transfer tax in Lancaster County totals 2%.
Pennsylvania realty transfer tax is collected, often along with an additional local realty transfer tax, by the county Recorder of Deeds. The Recorder of Deeds remits the Commonwealth's 1% to the Department of Revenue, and the locals have the option to share their realty transfer tax among school districts and municipalities.
Some real estate transfers are exempt from realty transfer tax, including certain transfers among family members, to governmental units, between religious organizations, to shareholders or partners and to or from nonprofit industrial development agencies. Deeds to burial sites, certain transfers of ownership in real estate companies and certain farms and property passed by testate or intestate succession are also exempt from the tax.
The realty transfer tax of 2% has been a stumbling block for lots of estate planning techniques. In general, transfers of real estate to family members have been exempted from the realty transfer tax. There was also an exemption for a transfer of a "family farm business" to a "family farm corporation" or to a general partnership. The exceptions were narrow and precluded a lot of planning techniques. What has not been exempt, however, is the transfer of farm real estate to many types of entities, even when the entity is wholly owned by family members. Many estate planning techniques that are desirable to reduce PA inheritance tax and federal estate tax, as well as providing for multiple family member ownership, require transferring interests in farm real estate to an entity such as a family limited partnership, LLC (limited liability company) or corporation. Many folks chose not to proceed with planning that otherwise made good sense because they didn't want to pay the transfer tax.
The new law, in section 9, first deleted the definition of a "family farm corporation," replacing it with a definition of a "family farm business." Now a transfer to a family farm business is exempt from the realty transfer tax. As defined, a "family farm business" is a corporation or association of which at least 75% of its assets are devoted to the business of agriculture and at least 75% of each class of stock of the corporation or the interests in the association is continuously owned by members of the same family. The business of agriculture 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.
The exemption applies to a transfer of real estate devoted to the business of agriculture to a family farm business by:
(1) a member of the same family which directly owns at least 75% of each class of the stock thereof or the interests in that family farm business;
(2) a family farm business, which family directly owns at least 75% of each class of stock thereof or the interests in that family farm business; or
(3) a transfer between members of the same family of an ownership interest in a real estate company or family farm business that owns real estate.
While the previous tax-free transfer transactions included only transfers to corporations and general partnerships, now any kind of entity, including limited partnerships and LLCs, can receive farm property free of transfer tax.
Family limited partnerships are a good entity to hold a family farm. Mom and Dad can put the farm in a family limited partnership without paying transfer tax and then transfer limited interests in the partnership to their children in portions low enough to minimize gift tax. Although the family farm can be exempted from Pennsylvania inheritance tax if the conditions of the exemptions are met, there is still the federal estate tax. Its exemption falls to $1 million as of January 1, 2013.