How would the Biden administration’s transfer at death or gift tax proposal work for a $5 million parcel of land that had appreciated by $3 million over the lifetime of the owner – if the American Jobs Plan or infrastructure program becomes law?
Kristine Tidgren, director of Iowa State University’s Center for Agricultural Law and Taxation, gave this example during her presentation for this year’s virtual Mid-South Agricultural and Environmental Law Conference.
“If I transferred a parcel of land purchased for $2 million that had appreciated $3 million, this proposal would trigger a tax on that capital gain,” she said. “My heirs would receive the land with a $5 million basis so the basis would be stepped up, but my estate would have to pay tax on the $2 million of gain that had accrued during my lifetime.
“The first $1 million of that gain would be exempt from tax and so that gain would get a tax-free step up in basis. The other $2 million my estate would have to pay tax on, and, as that happened, it would all get stepped up. The basis for my heirs would now be $5 million, but they or my estate would have had to pay a lot of tax to get there.”
Transferring the parcel as a gift would have a similar effect, she said. “But it would be a little less generous because under this proposal that $1 million exemption during a gift would not result in a tax-free step up. In other words, I wouldn't have to pay tax on that $1 million, but I wouldn't get a step up in basis.
“So a lot of us look at this and say ‘well that would be sort of a waste of your $1 million exemption because you're not getting any tax benefit from it. I would only have to pay tax on $2 million, same as the last example, but I wouldn’t get a basis step up to $5 million. I would only get a basis step up to $4 million.”
Tax on appreciation
Taxpayers should remember the proposal is not a change in the estate tax as some headlines have claimed. The estate tax is based upon the value of your estate at your death; this is a tax on the appreciation of your assets over your lifetime.
“If you had received your assets recently from somebody who was deceased, and you already got a step up this proposal wouldn't make much difference to your family,” she said. “But if all of the family’s farmland had just come out of a life estate where the basis is really old or had been purchased decades ago, this would make a huge difference because, as you all know, there's been significant appreciation in farm assets throughout the years.”
The Tax Cut and Jobs Act of 2017 doubled the estate tax exemption to $11.7 million. “So we currently have an exemption of $11.7 million in assets to get you out of the estate tax liability and under the current plan that that would remain,” she said. “But as you know, that increased exemption is set to go back down again in 2026.
“Come 2026, if there's no congressional intervention, it will go back to $5 million indexed for inflation. It seems the administration is looking at this and saying ‘the estate tax is probably going to take care of itself,’ so we’re not going to mess with that – we’re going to get this appreciation.”