Will We See an Increase in Section 2032A

• February 3, 2022
• Paul Neiffer

The first Build Back Better text released by the House had proposed reducing the lifetime exclusion from the current $12.060 million to $5.030 million starting this year. However, the text also proposed increasing the current Section 2032A exclusion from $1.23 million to $11.70 million indexed to inflation.

Section 2032A allows farmers and ranchers to reduce their farmland value from current highest and best use fair market value to the cash rent value. In return, the heirs are not allowed to step-up the basis in the farmland for this reduction; the family is required to farm the land for 10 years after death; and the IRS will file a lien on the farmland.

Here is an example of how this may work:

Bill and Mary own 2,000 acres of land in Iowa. The current value is $10,000 per acre for a total value of $20 million. The five-year average cash rent for comparable ground after subtracting real estate taxes is $250 per acre. The interest rate from the applicable Farm Credit Bank is 5%. This results in total cash rental value of $5,000 per acre or total value of $10 million. Under current rules, the estate could elect to reduce the estate by $1.230 million, but if the increased Section 2032A was in place, the estate could reduce the value by $10 million.

For larger estates, this provision is beneficial, however, remember that there is no step-up to fair market value for this reduction and in our example, if Bill and Mary’s heirs sell the ground for $20 million, they will owe capital gains taxes on $10 million of gain.

But if the goal is to keep the land in the family for multiple generations, then Section 2032A can help achieve this goal. This provision is not the law yet, but with it actually making the text of the original Build Back Better Act, there is a chance we may see it in the future. We will keep you posted.

, Farm Taxes | Comments Off on Will We See an Increase in Section 2032A