Initial reports of proposed tax changes by the new Biden administration have prompted concern by farmers and farm organizations.
According to a National Law Review blog in late January, proposals include an increased individual tax rate on taxpayers with income above $400,000; an increased capital gains tax rate for individuals with income in excess of $1 million; treating death as a taxable event, thus impacting the sale of assets for fair market value at death; phase-out of the pass-through deduction (Section 199A); repealing section 1031, which allows taxpayers to exchange like-kind real estate tax-free; reducing the estate tax exemption to $3.5 million, with $1 million for the lifetime gift tax exemption; and increase the maximum estate and gift tax rates to 45%.
Pork producer and blogger Wanda Patsche, Welcome, Minn., wrote about this in a Jan. 31 post. It has been shared numerous times, and she continues to receive feedback on it. She gave us permission to share it with The Farmer readers. Here is an edited version of it, written in first person:
“I was stunned as anyone when I read about the new Biden administration’s proposed changes to the capital gains tax and stepped-up basis. The intended capital gains tax will increase to 39.6%, the highest capital gains increase in U.S. history. In addition, it would NOT include a stepped-up basis. So what does this mean, and how will this affect the family farm?
“Typically, capital gains tax is the tax assessed on the profit when selling a piece of land, property or a business. A stepped-up basis is the revaluing of an asset at the time of death and/or purchase to the current value.
“For example, say a farmer purchased 160 acres in 1984 for $1,500 per acre for a total of $240,000. The farm was inherited by family members in 2021 after the farmer died. The value of the land at the time of death was $8,000 per acre, or a total of $1,280,000. Normally, the stepped-up basis will change to $8,000 per acre at the time of death; and if the farm was sold five years later and valued at $8,500 per acre, a capital gains tax would be assessed on the additional $500 per acre.
President Biden’s proposal would eliminate the stepped-up basis at the time of death, and when the property is sold, the capital gains tax would be assessed on the entire amount — the difference between $8,500 and $1,500 — at a rate of 39.6%.
“The total amount of tax would be $443,520.
“Yes, you read that correctly.
“In addition, Biden has also suggested a provision where the capital gains tax would be assessed at the time of death (and not just at the time of sale) of the farmer. Again, the tax would be $443,520.”
Unfair for government to take so much, blogger says
Patsche also notes that the proposal includes decreasing the federal exemption by half.
“What is heartbreaking is the notion that as a family farmer, we have spent years and years growing our farm with the hopes to pass it on to our family someday,” Patsche writes. “We have poured our life into starting and growing our farm. Knowing all the hours, stress and risk it took to build our farm, I feel disappointed that individuals in our government want such a big portion of our farm when we pass. Is this fair? How will our family keep the farm going? Simply, they won’t be able to. And this makes me both sad and angry. The government has no right to nearly 40% of our farm’s value.”
She encourages farmers to speak up and contact their farm organizations and representatives in Congress. She provides a link, too, for the latter.
Farm organizations' comments
Minnesota’s two general farm organizations provided statements per The Farmer request on the proposed tax changes.
Minnesota Farmers Union president Gary Wertish pointed out that the proposal hasn’t been submitted for legislation consideration yet. In the meantime, MFU reached out to the administration.
“We have heard from MFU members concerned that this tax plan could potentially make farm transfers more difficult,” Wertish says. “We have shared these concerns with the Biden administration through National Farmers Union and with Minnesota’s congressional delegation. As always, we want to make sure our tax system is fair to family farmers, and we will work with the administration and Congress to bring farmers to the table in these discussions.”
Minnesota Farm Bureau’s leadership says it also will work closely with the Biden administration and Congress to make sure that farmers and ranchers have a tax code that provides certainty and recognizes their unique financial challenges.
“The 2017 Tax Cuts and Jobs Act contains many permanent provisions that help farmers and ranchers. However, President Biden has released proposals that could impact some of the progress that has been made in recent years,” the MFB statement says. “Specifically, tax proposals such as an increased income tax rate or phase-out of the Section 199A business income deduction, would result in tax increases for many farmers and ranchers.
“Minnesota Farm Bureau has significant concerns with proposals that would impact capital gains taxes on family farms. Farm Bureau believes that capital gains taxes should not be collected at death, and the unlimited stepped-up in basis should continue. Starting or expanding a farm or ranch requires a large investment because of the capital-intensive nature of agribusiness, with land and buildings typically accounting for 79% of farm or ranch assets. The higher the capital gains tax rate, the greater the disincentive to sell property — or alternatively, to raise the asking price. If landowners are discouraged to sell, it can be harder for new farmers to acquire land, and hurt agriculture producers who want to buy land to expand their business to include the next generation.
“There is also significant attention to the future of the estate tax and the impact this could have on Minnesota farm families. When estate taxes on an agricultural business exceed cash and other liquid assets, surviving family partners may be forced to sell land, buildings or equipment needed to keep their businesses running. This not only can cripple a farm or ranch operation, but also hurts the rural communities and businesses that agriculture supports.”
Patsche acknowledges that the proposed changes may not happen. Maybe they are testing the waters, she adds. Regardless, she believes there will be tax increases somewhere.
“In the end, the most important thing is people stay informed and rely on people they trust,” she says. “This is another great example of why farmers need to stay connected to their legislators and let them know how [proposed laws] may impact them.”