The Biden administration’s proposal to repeal stepped-up basis and force recognition and taxation of capital gains at death is troubling for many Kansas farmers.
“If stepped-up basis is removed and forced recognition of gain at death is implemented, along with a lower inheritance tax exemption, farm assets like land and equipment would have to be liquidated to pay the tax bill,” Aaron Popelka, Kansas Livestock Association vice president of Legal and Government Affairs, told The Center Square. “These adverse tax events would impact all small businesses, not just agriculture. However, agriculture tends to be asset rich, but cash poor, and the effects of such policy changes would be devastating.”
Farmers are concerned about the budget reconciliation tax proposal because it could significantly disrupt the transition of family farms to the next generation.
Stepped-up basis is the process through which heirs receive a fair market value basis adjustment for inherited assets at the time of the decedent’s death. If the basis was not adjusted to fair market value, the heirs would receive the decendent’s basis, which is generally the price at which the decedent purchased the asset, less any adjustments like depreciation.
Popelka said the purpose of the capital gains tax is to tax an actual sale transaction where a seller receives income from the sale of an asset. Transfers on death are not sales, and there is no cash income that is received.
“For farm families, this means that the next generation will have to come up with cash from other sources to pay for the capital gains tax on the unrealized gain from the transfer,” Popelka said. “In many instances, this means that the farmland and equipment necessary to continue the operation would have to be sold. If the tax bill is large enough, it could lead to the farm selling out completely or shrinking enough in size that some operators would be forced to find other jobs.”
Popelka said it is also important to remember that farmland is often bought and held for long periods of time, and as a result, will develop a large difference between basis and fair market value at death.
“As a result, it is very easy to trigger the highest tax bracket on the transfer of even a small piece of land,” Popelka said. “This means the policy would impact small farm operations as well as large operations, which dispels the myth that this is simply a way to tax the wealthy.”
Double taxation through the removal of the inheritance tax exemption is also a current concern. Popelka said the inheritance tax taxes the entire value of a decedent’s estate after the exemption threshold has been applied. This means that it would apply a 40% tax rate on both the basis of the assets that were already subject to the income tax and the appreciation of the asset that was also subject to the capital gains should repeal of stepped-up basis with forced recognition of gain become law.