By Jennifer Whitlock
Field Editor

Tax proposals announced by the Biden administration would repeal the stepped-up basis, increase the capital gains tax rate and make it more difficult for farmers to use like-kind exchanges.

Currently, capital gains are taxed when an asset is sold. But transfers at death are not treated as a sale, and the capital gain is not taxed. In addition, heirs inheriting farmland may increase the tax basis of the property to fair market value without paying capital gains tax.

The property is “stepped up” to current value so that capital gains taxes would only be paid on appreciation since the property was inherited. The current top capital gains tax rate is 20%.

Biden’s proposal would repeal the step up in basis for gains over $1 million and collect capital gains at death unless the assets are donated to charity.

Preserving the step up in basis tax provision is imperative to keeping farms and ranches in the family, said Texas Farm Bureau (TFB) District 1 State Director Pat McDowell.

As a fourth-generation farmer and rancher in the Texas Panhandle, McDowell takes pride in what he and his family built over the past century. There are plans in place to transfer the farm to his niece and her husband after McDowell and his two brothers retire.

The McDowells grow cotton, corn, hay and wheat. They also have a cow-calf and stocker cattle operation. But with water resources growing scarcer, any potential buyer of the land in the future would likely be interested in using it for hunting or recreational use. The value of the land could possibly be much higher for wildlife than for raising cattle, McDowell said.

Under current law, if his niece inherited and then decided to sell the property, she would only pay capital gains taxes based on the property’s value at the time of inheritance, rather than on the increase in value since it was initially purchased.

But all that can change if Biden’s proposal passes through Congress as currently written.

“We just see that if the stepped-up basis went away, they’d be taxed on an asset that was purchased so many years ago, and at such an old value, that inflation is going to make their taxes so much higher than what they’d ever bargained for,” he said. “Our ranch has been in our family for such a long time, the land has significantly appreciated in value since it was purchased. It’s not really fair to her, or any future generation, to pay taxes on the full increase in value from when it was purchased 150 years ago or whenever. Taxes shouldn’t drive someone out of business just because they may have to sell some land.”

The brothers are actively speaking with estate advisors to determine if they need to re-evaluate their estate plan should the tax eliminations pass.

“There are really no good options,” he said. “The stepped-up basis was pretty much the cornerstone of all our estate planning. So, if it gets eliminated, that changes everything.”

While eliminating stepped-up basis would be tough for future generations, McDowell said the capital gains tax at death provision would be disastrous for family farms and ranches.

“It could be goodbye ranch, goodbye 100 years,” he said. “All the things that we’ve worked to keep together…if we had to pay taxes at death, that would basically be the end of the operation. That’s it, end of story.”

To combat the administration’s plans to eliminate stepped-up basis and impose capital gains taxes at death, TFB and the American Farm Bureau Federation have been communicating with members of Congress.

“In 2017, Farm Bureau worked really hard to make sure the Tax Cuts and Jobs Act included some tax reform to make the system more fair and friendly to Texas farm and ranch families,” Laramie Adams, TFB national legislative director, said. “We worked to eliminate the death tax. We ultimately compromised and doubled the estate tax exemption from $11 million per couple to $22 million, and that allowed us to keep the stepped-up basis.”

Now, with stepped-up basis under threat, TFB is urging congressional leaders to preserve existing rules for capital gains treatment, including the stepped-up basis.

“This is very important to our members and to agriculture. We’ve talked to our congressional leaders as we conducted farm tours across the entire state, trying to help them understand exactly how detrimental these tax changes could be to everyday Americans,” Adams said. “We’ve expressed how critically important it is that we continue to work to abolish the death tax, but also ensure the stepped-up basis remains in place.”

TFB has hosted over 40 congressional farm tours and visits so far this year and more are planned. TFB is hosting several upcoming tax roundtables for members to share personal stories with congressional leaders.

“Eliminating the stepped-up basis will have very real and negative impacts on family-owned businesses, the U.S. gross domestic product and job creation both immediately and in the long run,” he said. “If these detrimental tax proposals go through, this will effectively tax farmers and ranchers out of business and prevent them from passing the land from one generation to the next. If Congress doesn’t pay attention to this issue and continues to saddle farmers and ranchers with regulations and taxes, we will have a severe national food security issue on our hands when we tax them out of business.”