HARRISBURG, Pa. – Under Pennsylvania’s Installment Purchase Agreement, a 161-acre farm will be the first farm in Butler County to sell easements to preserve farmland.
Under the agreement plan, farmers can gain better tax advantage when selling their easements, by deferring all or part of the purchase price – and the resulting capital gains taxes – for up to 30 years.
Properties in Chester, Lancaster and Wyoming counties have already closed agreement plans early this year.
Marburger. Currently owned by Gordon Marburger, the Adams Township dairy farm has been in the Marburger family for 125 years.
Marburger said he is concerned about the tremendous pace of development in neighboring Cranberry Township – development that was beginning to impact the open space in his township.
“We needed another source of income, but we didn’t want the property turned into homes,” he said. “We’ve seen so many other area farms fall to development and didn’t want to face that possibility.”
More options. Marburger had been applying unsuccessfully to the county’s land preservation program since the mid-1990s and said the recent availability of the agreement plan made the farm’s preservation a more viable option.
“The greatest benefit of the IPA is that it furnishes us with enough regular income to maintain the farm,” he said.
Marburger will receive tax-exempt interest income of the easements’ sale over a 20-year period, avoiding the capital gains that would result from a lump-sum payout.
“It’s a good way to preserve the land, generate additional income and provide for our eventual retirement,” he said.
Background. The Installment Purchase Agreement plan is designed to enable farm owners to increase what they get to keep, and not just what they get, when selling easements. The sellers can opt to defer all or part of the easement’s purchase price for up to 30 years and defer capital gains tax for the same period.
In the interim, they receive interest twice a year on the outstanding balance. As with a municipal bond, those interest payments are exempt from federal and Pennsylvania state income taxes. Later, the sellers’ heirs can choose to sell the purchase agreements in the municipal bond market to pay estate taxes or capital gains taxes.
Capital gains tax is due when a seller receives payments for appreciated land or other assets. Capital gains is the difference between the sale price and the value of the property when it was first bought or inherited.
Rate. The Internal Revenue Service taxes capital gains at a maximum rate of 20 percent and Pennsylvania at a maximum 2.8 percent rate.
Howard County, Md., has used 30-year Installment Purchase Agreements to buy easements on 9,200 acres from 81 sellers since 1989. Similar programs are underway in Harford and Anne Arundel counties in Maryland; Virginia Beach, Va.; and Burlington County, N.J.
Pennsylvania Department of Agriculture is recommending the agreements to county farmland preservation boards because the structure minimizes cash needed to close on purchases. The rural character of many parts of Pennsylvania will be lost forever unless development rights are purchased soon.
The agreements permit as many as five times more purchases in the short term than if cash were paid for each acquisition.
Cash or installment. At the time farmers apply to their counties to sell development rights, they’ll be asked to choose among an all-cash or installment purchase, or some combination of the two.
After the terms of the sale are agreed upon, the purchase is submitted to the state’s department of agriculture for approval. Closing can occur within six months of state approval.
For information regarding installment purchases, call 717-783-3167. For information regarding tax treatment of easement sales, call 717-731-3546.
