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Step-up in basis rules: Are changes coming?

James-Pintar/Thinkstock Farm scene featuring silos and red barn
How changes in tax rules could affect your farm family.

Recently, there has been a lot of discussion on the tax changes that may or may not happen with Joe Biden becoming the 46th president of the United States of America. One thing that has come up has been removing the “step-up in basis” rules related to inherited property. Step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance.

A big concern

Inheritance is a major vehicle for farmers to increase family net worth so it’s a big concern for farming communities.

This is meant to be an example, but I’m sure it parallels some of your family’s story. Imagine your grandfather came back from the Korean War; he and your grandma took his money from his time in the service and the rest of their savings and bought 40 acres for $2,800, or $170/acre. He farmed that ground from the day he signed the deed. Your grandmother passed a few years back and Grandpa decided it was his time join her in 2020.

At the time of his passing, that 40 acres of the home farm was valued at $261,600, or $6,540/acre.

To keep this example straight-forward, the home farm was the only piece your grandfather held on to until he passed and willed it to you, your two sisters, and seven cousins (10 owners total). The ten of you decide to sell the lot to your one cousin – who worked with Grandpa and would very much like to farm that land. In his will, your Grandpa stated that the land should be sold at the estate value if it is sold within the family. You get $26,160 from the sale.

With the current tax rules, your basis in the land was “stepped-up” to $26,160 when you inherited it from the estate. Since the sale price is the same as your basis, you will not have to pay any tax on the transaction.

What would happen if…

If the step-up in basis rules are removed, your basis in the land would be what your grandfather paid for it in 1953; $680 total (four acres @ $170/acre). So now, you have a taxable gain of $25,480 ($26,160-$680). With current capital gains, your federal tax would be roughly $3,822.

After everything is said and done, you have a little more than $22,000 in your pocket; but that’s only four acres. You would pay $38,220 in tax if you inherited the entire 40 acres.

What if Grandpa had 400 acres or even 4,000 acres? So keep adding zeros on to that tax amount and you can see where people would get at little upset about losing the step-up in basis.

This article isn’t meant to scare anybody, and nothing is set in stone when it comes to politics and legislation. But, you might want to make sure your legislators and farm organizations know how you feel about this issue. And, you’ll just want to keep in touch with your CPA to keep up-to-date on the tax changes that could affect you and your farm.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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