Elimination of Stepped-Up Basis Concern for Agricultural Families

WASHINGTON, DC – In his first address to a joint session of Congress on Wednesday, President Joe Biden called for an end to “stepped-up basis” as a part of his tax plan aimed at paying for infrastructure and transportation upgrades, which drew a round of concern from commodity and general farm groups.

A recent study, commissioned by the Family Business Estate Tax Coalition explains that a longstanding provision of US tax law (Revenue Act of 1921) is that a capital gains tax is not imposed when assets are transferred at death to an heir. Furthermore, tax law allows the heir to increase their basis in the bequeathed assets to fair market value without paying capital gains tax. This is referred to as a step-up basis.

For example, suppose a family-owned cow-calf farm was purchased in 1990 for $2 million. Over the following years, the family grew the farm by purchasing $4 million of pastureland and growing and improving the cattle herd. By 2025, the farm’s value increased to $20 million with an annual income of $1 million. The owners’ heir inherited the farm in 2025 after the death of the owners so, under the current step-up of basis law, there would be no capital gains tax on the transfer of the farm ownership in 2025 after the death of the previous owners.

In contrast, if gains were taxed at death, there would be an immediate capital gains tax liability of $2.8 million. This tax is calculated based on the increase in the value of the family-owned farm since 1990. After subtracting the original basis ($2 million) and the land acquisition cost ($4 million) from the market value at death ($20 million), the capital gains tax would be paid on the remaining $14 million increase in value. At a 20 percent tax rate, the tax bill would be $2.8 million. This one-time tax payment is equivalent to 280 percent of the annual income of the farm. Given the land and capital-intensive nature of the business, a one-time payment of $2.8 million could create a significant burden on the new farm owners and could force them to sell this family-owned farm.
(SOURCE: All Ag News)