In a joint session address to Congress, President Joe Biden focused on continued calls to “build back better” and to pay for many of his priorities with tax reform. The American Families Plan encourages family farms to stay in the family and does not tax farm and asset transfer to family members upon death, but there are still concerns from farm groups on the impact to those in rural America.
The American Families Plan would repeal the deferral of gain for real estate like-kind exchanges – also known as 1031 exchanges- for gains greater than $500,000 and eliminate stepped-up basis for gains in excess of $1 million ($2.5 million per couple “when combined with existing real estate exemptions”) and tax said gains on any property not donated to charity.
According to the plan, the reform will be designed “with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”
This plan excludes the first $2 million of gains per couple ($2.5 million if the farm also includes the family home) from capital gains tax and heirs continue to get step up in basis on those first $2 million in gains. If an heir decides to sell the family farm, the first $2 million in gains is tax-free, USDA says in a fact sheet on the plan.
“Under this proposal, estimates indicate more than 98% of farm estates will not owe any tax at transfer, provided the farm stays in the family. The tax on the remaining less-than-2% would owe, would be on their non-farm assets,” USDA notes.
USDA explains if a married couple with $900,000 of farm gains and $200,000 of non-farm gains passes the farm onto their children, no capital gains taxes are owed, even if they sell the farm because the $1.1 million in gains are below the $2 million per-couple exemption. A married couple with $3.0 million of farm gains and $250,000 of non-farm housing gains passes the farm onto their children would pay no taxes as long as the children keep the family farm.
According to current USDA data, the average U.S. farm has about $1.45 million land. “If the exemption drops that far, that's a big problem,” says Roger McEowen, tax specialist at Washburn University.
"Family-owned cattle operations, no matter the size, are the backbone and economic drivers of rural economies across the U.S. Preserving long-standing tax provisions such as stepped-up basis and like-kind exchanges is critical when considering the financial viability of farms and ranches, as well as the ability for the next generation of producers to carry on the family business and conserve the land that has been in their family for generations," says Danielle Beck, National Cattlemen’s Beef Association senior executive director of government affairs.
National Association of Wheat Growers CEO Chandler Goule says, “We understand the American Families Plan’s goal is to target the ultra-wealthy and corporations who are able to evade taxes. However, farmers have several concerns about how changes to stepped-up basis and higher capital gains taxes on inherited assets could negatively impact families looking to pass along the farm to the next generation. Although the President’s plan says these reforms will be designed with protection in mind for family-owned businesses and farms, we want more details about how this would be achieved.
National Farmers Union President Rob Larew indicated that he had reservations about the pay-for provisions and sought more information. “While we support many of the recommendations in the American Families Plan, we have questions about how these tax proposals will impact our farms and ranches,” he says. “The devil is in the details.”