How Proposed Capital Gains Tax Changes Could Affect Family Farms

Farmers and ranchers have watched with anxiety the development of the US plan for families. Potential capital gains tax changes have been a hot topic since President Joe Biden announced the plan in April. The proposal would subject accumulated gains in asset value to capital gains tax on the death of the owner of the asset.

Under current legislation, capital gains can be passed on to heirs without being subject to capital gains tax because the value of assets is reset to fair market value at the time of inheritance. This asset valuation adjustment, known as the “raised base,” eliminates capital gains tax obligations on gains made before assets are transferred to heirs.

The AFP also included a provision that would exempt from capital gains tax $ 1 million in gains for estates of individuals and $ 2 million in gains for estates of married couples, as well as gains on personal estates. a personal residence of $ 250,000 for individuals and $ 500,000 for married couples. couples.

Earnings in excess of these exemption amounts would be subject to tax on death. However, the transfer of a family farm to a family member who continues the operation would not result in tax on the death of the main operator. Under the proposal, any remaining agricultural and business gains in excess of the exemption amount would benefit from a “deferral base” that would effectively defer any capital gains tax until the assets are sold or until the date of sale. ” that the farm is no longer owned and operated by a family.

Run numbers

Using data from the 2019 Agricultural Resource Management Survey, USDA Economic Research Service (ERS) researchers estimated that of the 1.97 million family farms in the United States, 32,174 fields would result from the death of the main operators in 2021.

According to the ERS, the proposal estimated that heirs of 80.7 percent of family farm estates would have no change in their capital gains tax liability upon the death of the primary farmer. The heirs of 18.2% of family farm estates would not have to pay tax upon the death of the primary farmer, but could be subject to a potential future capital gains tax liability on inherited farm gains if the heirs cease to operate. In addition, the heirs of 1.1 percent of estates would be liable to tax on non-farm gains on the death of the primary farmer and would have a potential future tax liability on capital gains resulting from inherited farm gains if the heirs cease to cultivate.

The farmer’s reaction

However, according to a Market Intel article from the American Farm Bureau Federation, farmers remain cautious about this analysis of the ERS and the wording of the proposal.

“Other analysts, including many economists, tax experts and the American Farm Bureau Federation, argue that deferred taxes on capital gains can have significant implications for a farm, even if it continues to be operated by the family. . This is because it is easy to say that taxes will be deferred, but it is difficult to enshrine this deferral in law in a way that matches the intention, and even more difficult for farmers to maintain. this postponement. There are many ways that “continue to be exploited by family” could work against it, including how “family” is defined by the IRS versus how the USDA defines it, changes to family status, rules regarding clawback and changes to rules regarding material participation, to name a few. So while the intention to defer taxes may be good, those deferred taxes can hang over an operation like a dark cloud. “

The data from Market Intel’s analysis also takes into account that the results change dramatically as the farm size increases. Considering the size of the farms, 64% of mid-size farms, 77% of large farms, and 94% of very large farms would have a capital gains tax deferral due to ATP.

Additionally, Farm Bureau’s analysis highlights the differences when the value of production is taken into account:

• 18.2% of estates created that would not be subject to capital gains tax on death but could have a deferred tax liability represented the vast majority (63.2%) of the production value of estates created.
• The 80.7% of estates created that would not be subject to capital gains tax on death represented just over a third (34.6%) of the production value of estates created.
• The 1.1% of estates created which would be liable to capital gains tax on death represented only 2.1% of the production value of estates created.

Read the rest of the analysis here.