Pennsylvania Preserved Farms Resource Center’s …...next generation between death of two spouses,...

Pennsylvania Preserved Farms Resource Center’s Farm Transition Planning Workshop

November 10, 2016

jayclark@pennaglaw.com 717.464.4300

Taxable Income Tax Rate Capital Gain Tax Rate

<$18,550 10% 0%

$18,550 – 73,500 15% 0%

$73,500 – 151,900 25% 15%

$151,900 – 231,450 28% 15%

$231,450 – 413,350 33% 15%

$413,350 – 466,950 35% 15%

>$66,950 39.6% 20%

Taxable Income Tax Rate Capital Gain Tax Rate

<$9,275 10% 0%

$9,275 – 37,650 15% 0%

$37,650 – 91,150 25% 15%

$91,150 – 190,150 28% 15%

$190,150 – 413,350 33% 15%

$413,350 – 415,050 35% 15%

>415,050 39.6% 20%

Farm/business income

Interest

Gain from sale of equipment

Sale of Land

Sale of Buildings

How You Got It How Tax Basis is Determined

Inherited Date of Death Value

Purchase Purchase Price

Gifted Donor’s tax basis transfers

1031 Exchange Tax basis of property sold transfers

How You Got It How Tax Basis is Determined

Inherited Date of Death Value

Purchase Purchase Price

Gifted Donor’s tax basis transfers

1031 Exchange Tax basis of property sold transfers

Increases Decreases

Improvements Depreciation for equipment and buildings (not for land)

Partial Sale, such as ag easement or sale of lot

A surviving spouse can claim 100% step-up in basison jointly titled property acquired from a deceased spouse if:

◦ the property had been acquired jointly before 1977 and

◦ the deceased spouse contributed 100% of the purchase of the real estate property

Pay 100% in year of sale

Pay over time in installments

Defer through a 1031 exchange

Avoid by giving to charity

Avoid by holding until death

Seller Financing

With each payment, Seller receives:◦ Interest -Ordinary income

◦ Tax basis -Not taxed

◦ Gain -Capital gain

Gross Profit Ratio◦ Gain divided by Sales Price

Defers federal income tax only

No deferral of PA income taxes

Relinquished Property = Property sold◦ Conservation Easement

◦ Farm

Replacement Property = Property bought

Boot = What you receive when you sell that has not been reinvested in real estate◦ Cash Boot: Cash received

◦ Debt Boot: Reduction in debt

Relinquished and Replacement Properties must be:◦ Held for business or investment purposes

and◦ Like-kind property

Held for business or investment purposes◦ Not principal residence◦ Not vacation home

Like-kind Property◦ Raw land◦ Rental property

Identification Period = 45 days after sale of Relinquished Property

Replacement Period = 180 days after sale of Relinquished Property or deadline for filing tax return, if earlier

May need to extend income tax return in some cases

Cannot use exchange proceeds to build on your own property

Can build on new Replacement Property but must do so by end of the Replacement Period

Transfer to Charity prior to sale avoids tax on gain

Payment to Charity does not avoid tax on gain

Charitable deduction

Outright gift

Gift annuity

Charitable Remainder Trust

Gift can be from 0 – 100%

Step up in Tax Basis to Date of Death Value

Preferred investment options

Debt to pay

Better financing options for next generation◦ Interest rate

◦ Length of repayment

Lower tax bracket in future years◦ 0%

◦ 15%

◦ 20%

Interest from next generation is better and/or safer return on sales proceeds

Assist next generation with financing

Doesn’t want to pay the tax Wants to buy other real estate◦ Another farm for another child◦ Residential rental property for another child◦ Residential rental property(ies) for investment income◦ Commercial rental property(ies) for investment income◦ Investment real estate – Hunting cabin◦ Future home for themselves; must be rented first for several

If replacement property(ies) held until death, tax is avoided

Capital gains tax avoided

Income tax charitable deduction

Depending on non-charitable beneficiaries◦ No inheritance tax

◦ No federal estate tax

Stream of cash flow to income beneficiary – 5% minimum

Beneficiary can be:◦ Seller and spouse◦ Children and Grandchildren◦ Siblings

Wealth Replacement Trust funded with life insurance

Pay 100% in year of sale

Pay over time in installments

Defer through a 1031 exchange

Avoid by giving to charity directly or through a Charitable Remainder Trust

Avoid by holding until death

Annual Gift Tax Exclusion -$14,000 per recipient

Lifetime Gift/Estate Tax Exclusion - $5,450,000

Beneficiary Tax Rate

Spouse and Charity 0%

Children and lineal descendants 4.5%

Siblings 12%

All others, including nieces and nephews

Generally, fair market value of assets owned

Life Estate

Exempt Transfers

◦ Life insurance proceeds

◦ Certain Farm Transfers (2012)

◦Qualified Family Owned Business (2013)

Lineal descendants and siblings exemption

Business of agriculture exemption

Transfer to or for the benefit of lineal descendants or siblings of:◦ Agricultural reserve, agricultural use property or a forest

reserve (similar to Clean & Green/Act 319)◦ An agricultural commodity, including any and all plant and

animal products, including Christmas trees produced in the state for commercial purposes

◦ An agricultural conservation easement

No annual certification or gross income requirements

Transfer to or for the benefit of Members of the Same Family of real estate devoted to the Business of Agriculture provided that after the transfer:o The real estate continues to be devoted to the

Business of Agriculture for a period of seven years beyond transferor’s date of death and

o The real estate derives a yearly gross income of at least $2000.

Leasing property which is directly and principally used for agricultural purposes to:

◦ Members of the Same Family or

◦ A corporation or association owned by Members of the Same Family

Recreational activities such as, but not limited to, hunting, fishing, camping, skiing, show competition or racing

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

Fur farming

Stockyard and slaughterhouse operations

Manufacturing and processing operations of any kind

Real estate leased to unrelated third parties

Real estate leased for non-agricultural purposes

Real estate used for non-exempt purposes, even if affixed to exempt real estate, must be valued separately and taxed

Commercial buildings not used in the business of agriculture

Homes on real estate that otherwise qualifies for the exemption is presumed to be used in the business of agriculture.

Any individual

Individual’s brothers and sisters,

Brothers and sisters of such individual’s parents and grandparents

Ancestors and lineal descendants of any of the foregoing

Spouse of the foregoing

Estate of the foregoing

Individuals related by half blood or adoption

Step children

Certifies $2000 of gross income

Filed by every member of the same family who has inherited business of agriculture exempt real estate

Filed each year for a period of 7 years beyond the decedent’s date of death

Since July 1, 2013, new exemption for qualified family-owned business

If requirements met no tax on business interests under $5,000,000

Use net book value Less than 50 full time employees In existence for at least 5 years prior to date of death LLC, Corporations, Partnerships, Limited Partnerships Rentals Annual Certification for 7 years

Exemptions can work in duality

If farm is run in an entity and land still privately owned

Entity can be exempted as Qualified Family Owned Business

Land can be exempted under Business of Agriculture

If the exemption was not claimed,

there is an opportunity to recover tax paid

Pennsylvania Inheritance TaxRefund

Beneficiary % Refund

Children 4.5% $67,500

Siblings 12% $180,000

Others 15% $225,000

The refund on a farm taxed at $1.5 million

Pennsylvania Inheritance TaxRefund

Refunds can be obtained three years after filing of tax or Department of Revenue determination of Inheritance Tax

Practically, can obtain refunds between 3 ½ years to 5 years after date of death

If the plan is to sell to the next generation between death of two spouses, then put asset into name of one spouse

Full step up in tax basis at death of first spouse

Trust for

Spouse

Proceeds to Children at 2nd Death

Farm - $0 Inheritance tax

Trust sells farm - $0 Capital Gain

$0 Inheritance tax

Five year look back period

Ineligibility period for Medical Assistance

Long term care insurance

Healthcare Power of Attorney and Living Will

Power of Attorney for Financial Matters

Last Will and Testament

Beneficiary Designations

Sole Proprietorship

Partnership

Limited Partnership (LP)

Limited Liability Company (LLC)

Corporation

Limited Liability Partnership (LLP)

Call or Email Me

Jay Clark

www.pennaglaw.com

jayclark@pennaglaw.com

(717) 464-4300

Pennsylvania Preserved Farms Resource Center’s …...next generation between death of two spouses,...

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