Pennsylvania Farm Succession & the Agricultural Exemption Guide

If your family owns farmland in Pennsylvania and you are starting to think about who takes over when you retire or pass away, one exemption in the inheritance tax code can be worth more than any other planning tool you touch: the agricultural exemption under 72 P.S. § 9111(s). Used correctly, it can shrink the taxable value of a working farm to zero for the family members who continue to work it. Used carelessly — or forgotten about after the transfer — it can trigger a rollback tax years later. This guide walks through how it actually works.

If any part of this raises questions specific to your farm, schedule a free consultation with our office. Farm succession planning combines inheritance tax exemptions, business structuring, and multi-generation fairness, and it is worth getting right before you sign anything.

What qualifies as "land devoted to agricultural use"

Section 9111(s) exempts the transfer, at death, of real estate devoted to the business of agriculture when it passes to a qualifying transferee. To qualify, the land generally must:

• Be at least 10 contiguous acres in agricultural use, agricultural reserve, or forest reserve, or otherwise meet the anticipated yearly gross income threshold used for Clean and Green purposes.
• Have been devoted to the business of agriculture — meaning the raising of crops, livestock, poultry, dairy products, or similar farm commodities for commercial purposes — as of the decedent's death.
• Continue to be devoted to agricultural use for seven years after the decedent's death.

The exemption also reaches related agricultural assets under §§ 9111(s.1) and (s.2): agricultural commodities (stored crops, livestock, and similar inventory) and farm machinery and equipment used in the business, when transferred with the real estate to a qualifying transferee. A separate provision addresses land subject to a perpetual agricultural conservation easement.

Who is an eligible transferee

The exemption is not available to just anyone who happens to inherit the farm. The transferee must be:

• A member of the same family as the decedent (generally lineal descendants, siblings, and their spouses, and in some structures a business entity wholly owned by qualifying family members), or
• An entity such as a corporation, partnership, or trust, so long as it is at least 50% owned by members of the decedent's family and the land continues in the business of agriculture.

A transfer to an unrelated third party — even a longtime farm employee or tenant — will not qualify, no matter how well that person farms the land.

The seven-year continued-use requirement and rollback

This is the part families miss most often. The exemption is conditional, not permanent. For seven years after the date of death, the land (and the exempted equipment or commodities) must remain devoted to agricultural use and must remain in the hands of a qualifying transferee.

If, within that seven-year window, the property is:

• converted to a non-agricultural use,
• transferred to someone who is not a qualifying family member or family-owned entity, or
• otherwise disqualified,

the exemption is retroactively lost as to the disqualified portion, and the estate (or, more precisely, the transferee who benefited) owes the inheritance tax that would originally have been due, calculated back to the date of death. Pennsylvania law also requires the transferee to notify the Department of Revenue of the disqualifying event. Failing to self-report does not make the liability disappear — it just adds interest and risk of penalty on top of the recaptured tax.

A sale of standing timber, a normal crop rotation, enrolling acreage in a conservation program, or leasing to another family member who continues farming generally does not trigger rollback. Selling off a building lot, developing a subdivision, or transferring the parcel to a non-family buyer typically does.

Claiming the exemption: Schedule AU

The exemption is claimed on Schedule AU filed with the REV-1500 Pennsylvania Inheritance Tax Return. Schedule AU requires:

• A description and parcel identification of the real estate.
• A statement of how the land has been used for agricultural purposes.
• Identification of the transferee(s) and their family relationship to the decedent.
• An acknowledgment of the continued-use requirement and the transferee's obligation to notify the Department if the land is later disqualified.

The Register of Wills forwards inheritance tax filings to the Department of Revenue, which reviews Schedule AU along with the rest of the return. Errors or omissions on Schedule AU are one of the more common reasons the Department opens a follow-up inquiry on an otherwise routine farm estate.

Coordination with Clean and Green (Act 319)

Families often confuse the § 9111(s) inheritance tax exemption with Clean and Green, the Act 319 preferential property tax assessment program. They are entirely separate:

• Clean and Green reduces annual local property tax assessments for enrolled farmland, forest reserve, and agricultural reserve land, administered at the county level.
• Section 9111(s) reduces or eliminates Pennsylvania inheritance tax owed at death, administered through the Register of Wills and Department of Revenue.

A farm can be enrolled in Clean and Green for years and still owe full inheritance tax at death if the transfer doesn't independently satisfy § 9111(s)'s qualifying-transferee and continued-use rules — and vice versa. Removing land from Clean and Green triggers its own rollback tax under the property tax statute, which is calculated differently and is separate from any inheritance tax rollback. Both rollback exposures should be reviewed together whenever a farm changes hands or use.

LLC and entity ownership issues

Many modern farm operations hold land, equipment, and the operating business in one or more LLCs for liability protection. This does not disqualify the exemption, but it adds a layer of analysis:

• The entity must be substantially family-owned (generally at least 50%) for the transfer of an interest in the entity — or land held by the entity — to qualify.
• Membership interest transfers need to be tracked the same way real estate transfers are, since a later sale of LLC units to a non-family investor can be a disqualifying event just as a sale of the land itself would be.
• Operating agreements should be drafted with the exemption's continued-use and family-ownership requirements in mind, particularly buy-sell provisions that could otherwise force a sale to an outside party.

The family-owned business exemption as a complement

Not every part of a farm operation is agricultural real estate. Trucking, a retail farm store, a value-added processing operation, or custom-work equipment may fall outside § 9111(s) but could still qualify for the separate qualified family-owned business exemption under 72 P.S. § 9111(t), which exempts transfers of an interest in a qualifying family-owned business with fewer than 50 full-time employees and net book value under $5 million, subject to its own seven-year continued-ownership requirement. Larger, diversified farm operations frequently use both exemptions side by side — the agricultural exemption for the land and farm equipment, and the family business exemption for the non-farm operating pieces.

A practical checklist for farm families

• Confirm the land meets the 10-acre / agricultural-use threshold and document current farming activity.
• Identify which family members or family-owned entities will receive the land, and confirm they meet the "qualifying transferee" definition.
• Draft or update the will, trust, or LLC operating agreement to steer the farm to qualifying transferees specifically — not simply to "my children" without regard to who is actually farming.
• Build in a plan for non-farming children so the farming heir isn't forced to sell land to buy out siblings, which itself can jeopardize continued agricultural use.
• Calendar the seven-year continued-use window and the obligation to notify the Department of Revenue of any disqualifying change.
• Review Clean and Green enrollment separately from the inheritance tax exemption.
• Coordinate LLC ownership and operating agreements with the family-ownership requirements.
• Evaluate whether the § 9111(t) family business exemption applies to non-real-estate parts of the operation.

For a broader look at structuring the transition itself — successor management, buy-sell agreements, and funding an equitable plan for children who won't be farming — see our business succession planning services, and browse more planning topics in our learning center.

Talk with a Pennsylvania estate planning attorney

Farm succession planning sits at the intersection of tax law, family dynamics, and the practical realities of running an agricultural business. Getting the exemption right the first time avoids a rollback tax bill that can arrive years after everyone thought the transition was finished. Contact our office for a free consultation to talk through your farm, your family, and the plan that fits both.