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Last Updated: 6/26/2017

Recapture Tax

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​What is Recapture Tax?

Estates that claim the qualified small business property or qualified farm property deduction are subject to a three-year holding period. If the qualified heirs do not meet certain requirements during this time, the estate is subject to a Recapture Tax.
 
The qualifying heirs must file a Recapture Tax return and pay the tax within six months of any change that breaks the holding period requirements. The tax is equal to 16 percent of the deduction amount.
Click here to file a Recapture Tax return.

 

What are the qualified small business property three-year holding period requirements? 

For the estates that elected the qualified small business property deduction, the qualified heirs must do the following for the three years after death:
  • A qualified heir must own all interest in the qualified property (a disposition to a qualified family member does not trigger Recapture Tax).
  • A family member must materially participate in the operation of the trade for business.
     

What are the qualified farm property three-year holding period requirements?

For the estates that elected the qualified farm property deduction, the qualified heirs must do the following for the three years after death:
  • A qualified heir must own all interest in the qualified property (a disposition to a qualified family member does not trigger Recapture Tax).
  • The farm property must maintain the 2a (agricultural) classification for property tax purposes.
     

Are there exceptions for the three-year holding period requirements?

There are exceptions for the qualified farm property deduction. None of the following will trigger the Recapture Tax during the holding period:
  • The farm property is acquired by a governmental unit through eminent domain for a public purpose.
  • Part of the farm property (less than 1/5 of the claimed acreage) is reclassified for property taxes from 2a (agricultural) to 2b (rural vacant land), as long as the qualified heir has not substantially altered the property.
  • Part of the farm property (consisting of a house, garage, and up to one acre of land) is reclassified for property taxes from 2a (agricultural) to 4bb (residential non-homestead).