Ag Groups Did Not Go Far Enough!
32 Farm Groups jointly sent a letter to the House Ways and Means Committee dated March 29, 2017. This letter asked for Congress to repeal the estate tax AND keep basis step-up for farm families. They noted that the tax laws passed in 2012 had helped American Farm Families retain their farms due to the about $11 million of joint assets not being subject to estate tax.
However, their other point was to ask for Congress to retain the basis step-up that heirs receive when they inherit property. As an example suppose Farmer Sue owns land she bought 40 years ago for $100,000. It is worth $1 million when she passes away. The heirs will owe no estate tax and will get to reset the land cost basis at $1 million. This means they can sell the land for $1 million and pay no capital gains tax. It does not matter what Sue paid for it.
This is a very powerful income tax provision for our farmers. However, in my opinion, the letter did not go far enough. One option that is being floated around in Congress right now is to implement a capital gains tax at death similar to the Canadian tax system. This means in our example of Farmer Sue, in the year that she passes away, her final income tax return would show a gain of $900,000 on her farm land. The heirs would have to pay capital gains tax on this gain, but they would get a step-up to $1 million on the land.
I believe that the letter should have asked for Congress not to consider implementing a capital gains tax at death too since a capital gains tax actually provides for a step-up in basis, but not the way that most taxpayers would appreciate. We will keep you posted.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
If the capital gains tax at death (Canadian tax) provision would be implemented, would it make any difference if the land was in an entity such as an LLC versus individual ownership?