Under current law, stepped-up basis allows a farmer to pay capital gains taxes only on property’s increase in value since the date the land was inherited, not on the full increase in value since the date it was purchased by that farmer’s parents or grandparents. Eliminating the stepped-up basis would make continuing on the family farm extremely costly since the value of many farms is tied up in land and equipment, which are highly illiquid assets. The next generation could be forced to liquidate assets – or even sell the farm – just to pay the taxes.
Unfortunately, there are several proposals to get rid of these beneficial tax provisions. The STEP Act announced by Senator Van Hollen proposes to eliminate stepped-up basis upon the death of the owner, and the 99.5 Percent Act introduced by Senator Sanders decreases the estate tax exemption down significantly from where it is today.
Recently, the Agricultural and Food Policy Center at Texas A&M University developed a study showing the impact of potential inheritance tax changes and found that if both the STEP Act and the 99.5 Percent Act were simultaneously implemented, 92 of the 94 representative farms would be impacted, with additional tax liabilities incurred averaging $1.43 million per farm.
Stepped-up basis encourages families to grow their business and pass it on to another generation. Without this incentive, it would be difficult to enter business-like farming and ranching. An estate tax does just the opposite, making it more difficult for families to pass along their farms and ranches to their children and grandchildren. Imposing both tax burdens at the same time would mean disaster for family farms across the nation.
Arizona Farm Bureau believes that, at the very least, capital gains taxes should not be collected at death, and the unlimited step-up in basis of inherited assets should continue. The good news is that Farm Bureau is working around the clock to advocate for tax policy that encourages family businesses, rather than hurting them. To contact your Member of Congress about the importance of protecting a step up in basis, visit: www.azfb.org/Public-Policy/Action-Center
Editor's Note: This article first appeared in the August 2021 issue of Arizona Agriculture