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S.F. No. 2517 - Modifying application of recapture tax for disallowed qualified property subtractions (as proposed to be amended by A-2 amendment)
Author: Senator Torrey N. Westrom
Prepared By: Nora Pollock, Senate Counsel (651/297-8066)
Date: March 6, 2018


Under current law, to qualify for the qualified farm property subtraction or qualified small business property subtraction for purposes of calculating the Minnesota taxable estate, the property must meet certain criteria in the three years prior to the decedent’s death and the three-year period following the decedent’s death (the “holding period”). Among other requirements, for the qualified farm property subtraction, a qualified heir must have acquired the property and the property must retain classification as 2a (agricultural) property for the three-year holding period (with two small exceptions). For the qualified small business property subtraction, during the three-year holding period the trade or business must not be a passive activity and a family member must materially participate in the business. If property ceases to qualify during the three-year holding period, a 16% recapture tax is applied to the entire value of the subtracted property.

This bill has two components:

First, it would apply the recapture tax to the value of farm property disqualified due to losing class 2a status or to the value of small business property disqualified due to a change in a family member’s material participation in the trade or business. The value of the property is the greater of the fair market value when it ceased to satisfy the requirements described above, or the value of the property when it was included on the estate tax return. Effective for estates of decedents dying after June 30, 2018.

Second, the bill provides that the recapture tax does not apply if less than one-fifth of the qualified farm property included in the subtraction is reclassified during the three-year holding period and the qualified heir has not substantially altered the use of the reclassified property during the holding period. Effective retroactively for estates of decedents dying after June 30, 2011 (the original enactment date of the subtraction).

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