Smith, Burnett & Hagerman, LLC

Don't Tax Me! Tax The Other Guy

As we know, start-up farming is difficult these days. In earlier times it was simpler. After the Revolutionary War, the soldiers who mustered out of the service were given federal land warrants for services rendered. Public lands were used as pension grants. The veterans got their land warrant which they sold for cash (providing the vets with a modest one-time pension). Bankers bought the warrants and sold them with interest to young farmer-settlers in western states and territories. Young farmers got land to begin their farm, and bankers made money. Everyone got something.

The Obama Administration, in his 2015 State of the Union message, hinted at the opposite sort of change—making it difficult to pass along the small family farm to heirs. Unfortunately, the Biden Administration is making the same sorts of noises. In order to increase capital gains taxes on the wealthy, the law is changed so that many middle-income persons, even the working poor, pay capital gains taxes.

When someone dies and wills the heirs property, those inheriting anything but cash property, especially real estate or stocks and bonds, get a "stepped up" capital gains tax basis. The value of the property at the decedent's death is the value for the estate purposes, not the value of the property when the decedent acquired it.
Example: Grandma buys AT&T stock in 1943 for $4.00 per share. She dies in 2021 and her stock is worth $400.00 per share. The heirs (who could be middle to lower income people) inherit property at $400 per share (the "stepped up" new stock basis for the heirs). Without the stepped-up basis, heirs would pay a capital gain of $396 times the number of shares inherited. If there were 1000 shares, the capital gain on $396,000 would be 15 to 20%.
The stepped-up basis saves paying a capital gains tax on inherited property. The Obama administration, and now the Biden administration too, want to repeal the stepped-up basis, meaning someone inheriting farmland and then pays a capital gains tax in order to inherit the property.
Example: Grandpa owns blackacre and paid $50,000 for it when he was just starting his farming career. At his death he wills the land to grandson. The land appraises for $350,000. Grandson pays 20% on $300,000 just to inherit land under the Obama/Biden administration.
When President Trump was elected, in 2017 estate taxes were decreased and the stepped-up basis was retained. However, President Biden is reconsidering the repeal of the stepped-up basis, if he can get it through a narrowly divided Congress.

The Difference Between Estate Taxes and Capital Gains Taxes. The estate tax rate on property that is not exempt from the estate tax is 40%. That's a nasty bite out of an inheritance. That's the bad news. The good news, if there is any, is the government does not bite the estate unless the estate exceeds $11.5 million in 2020. If the decedent's total value of all property being probated (or a trust being administered) is less than the exemption, there is no estate tax.

Hopefully, the Biden Administration will give up on the repeal of the stepped-up basis. A lot of Democrats who supported Biden have small farms and businesses they want to will to their heirs. The repeal would bite them hard, too. They don't like taxes any more than anyone else.