Pa. farmers could get a big tax break

HARRISBURG, Pa. – The Pa. Department of Agriculture’s Bureau of Farmland Preservation is stepping up its campaign to purchase agricultural conservation easements.

Under a pilot program, farmers can sell easement rights using installment purchase agreements, or IPAs, that defer all or part of the purchase price for up to 30 years. The farmers will receive interest payments, which are exempt from federal and state income taxes, twice a year on the balance of the sale.

“Before, farmers were given a lump or installments up to five years, but that money has always been taxable,” said Ray Pickering, director. “Now they can string it out for up to 30 years, get interest payment, get the balance at the end of the term and ultimately defer any capital gains tax. Some may never have to pay capital gains tax.”

By deferring the principal payments for up to 30 years, IPAs minimize cash needed to close on purchases, allowing as much as five times more purchases a year.

When a farmer is ready to sell an easement to the county, they are asked if they prefer all cash, installments or a combination of two. The counties and sellers determine the terms of the transaction. These terms are then submitted to PDA for approval.

The farmer will be given a fixed interest rate based on market yields. At closing on an IPA, the farmer gives a deed of easement to the county/state. The easement contracts the seller and anyone else who owns the property from ever developing it for anything but agricultural uses.

The IPA will restrict any transfer of ownership for one year except to settle an estate. However, the IPA has no effect on the ownership of the property after that first year. The farm can be sold at any time, and the seller will continue to receive interest payments until the IPA matures and the principal payment at the term of the agreement.

Pickering says there have been many informational meetings for ag preservation boards and county commissioners and meetings just for farmers and their financial advisers.

“We urge farmers to consult their tax advisers. This is a big decision that could have a big impact on their financial standings,” said Pickering. “We had many farmers show up to a November meeting in Westmoreland including farmers from eight counties in western Pennsylvania.”

In addition to the cost of an adviser, the seller may be responsible for transaction costs of up to $20,000 and any costs associated with selling the IPA.

Pickering admits IPAs may not be right for every farmer, depending on how long they have owned the farm.

“If someone just inherited the farm, their capital gains isn’t going to amount to much, but if they bought the farm 40 years ago, they are going to be looking at high capital gains and this program may really benefit them,” said Pickering.

For more information about IPAs, contact your county farmland preservation board or Pickering at 717-783-3167 or rpickering@state.pa.us.

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