In April, President Biden announced a proposal that caught the attention of farmers and ranchers across the country. To help fund his $1.8 trillion American Families Plan, Biden suggested eliminating the stepped-up basis provision and allowing capital gains to be taxed at death—a move that many agricultural advocates believed would harm the longevity of family farms.
The stepped-up basis is a provision in the tax code that allows the basis (or initial value) of an asset to be reset to its fair market value upon inheritance, thus eliminating capital gains tax owed as assets are passed from generation to generation. For farmers and ranchers, these assets may include land, livestock, and equipment essential to the operation of a modern agribusiness.
The stepped-up basis has been an essential tool for retiring producers who want to keep their operations in the family without passing along the financial burden of capital gains tax, especially as land prices have risen at exponential rates. For example, if a farmer purchased 500 acres of land in 1985 for $750,000, that same land would be worth nearly $1.58 million today, costing the farmer capital gains tax on $830,000 of asset appreciation upon sale. If the farmer passes down the land to an heir at death, however, the stepped-up basis allows the heir’s basis to “step up” to $1.58 million, so capital gains tax would be due only on gains in excess of $1.58 million should the heir decide to sell.
While Biden’s proposal did suggest eliminating the stepped-up basis, it also included guidelines intended to protect family farms. Under the proposal, capital gains would be tax free up to $1 million for individuals ($2 million for couples). In addition, no capital gains tax would be due at death should the heir remain the owner and operator of the farm; instead, the basis would be carried over with no capital gains tax owed until sale outside of the family.
Even with these exemptions in place, Biden’s proposal was met with concern and opposition from rural supporters in Congress, both Republican and Democrat. In addition, nearly 330 agricultural organizations submitted a letter to the House Ways and Means Committee in opposition of the proposal, citing implications to land access and cash flow. As a result, on Sept. 13, the House Ways and Means Committee released its tax package without inclusion of the proposal, securing the stepped-up basis for the foreseeable future.
Feature photo by Kylie Kai