A proposal to eliminate the stepped-up basis in agriculture would have a costly impact. Tax policy is important in helping farmers pass their operations on to future generations. John Newton, chief economist for the American Farm Bureau Federation, talks about what eliminating the stepped-up basis will mean for farmers.
“To reduce the capital gains tax, farmers and ranchers use stepped-up basis, which provides a reset for the basis during intergenerational transfer or to the market value at the date of death. Without stepped-up basis and considering the dramatic increase that we’ve seen in land values in the recent decades, many farmers would face a burdensome tax hike through capital gains taxes when they sell all or a portion of the farm’s assets.”
He says the American Farm Bureau and the American Soybean Association recently ran the numbers on what the potential gains taxes would be per acre of cropland.
“Based on USDA’s data from 1997 and assuming a capital gains tax rate of 20 percent, we found that the taxes would be anywhere from 500-to-800-dollars per acre across the Corn Belt, and over a thousand dollars per acre in portions of Iowa and Illinois. And areas closer to urban areas, where land values have appreciated more rapidly, the taxes could be even higher per acre. The longer the land has been in the family, the higher the capital gains tax is most likely going to be.”
Newton says the tax would be a financial burden for farms for up to a decade.
“I think one way to put that into perspective is to think about the income generation on the farm. And so, we looked at cash rental rates across the country, and that $500 to $1,000 per acre in taxes in many cases was 400 to 500 or even 1,000 percent of the cash rental rate, so it’s a hefty tax hike that would take several years; four, five, six, or as many as ten years to meet that tax obligation.”
He says farmers can write their members of Congress asking for support of the stepped-up basis at fb.org/advocacy.