Stepped-Up Basis

Farmers and ranchers rely on tools in the tax code like stepped-up basis to ensure the long-term sustainability of their businesses.

Issue Overview

Farmers and ranchers rely on tools in the tax code like stepped-up basis to ensure the long-term sustainability of their businesses. They borrow and invest large sums of money in capital assets like land, buildings and equipment in order to produce our nation’s food, fuel and fiber. Such high upfront costs are standard across agriculture, come with significant financial risk and can present roadblocks, especially to beginning farmers and ranchers. Farmers and ranchers understand that any return on their investment will not come immediately, and it’s a risk not many people can take.

Capital gains taxes are paid when a business—including a family farm or ranch—sells a long-term capital asset, such as land. The tax is based on the amount that the asset has increased in value since purchase. Thanks to a special provision in the tax code, however, capital gains taxes are not imposed when assets are transferred to an heir after the death of a loved one. Tax law also allows the heir to increase, or step up, the basis of the inherited assets to fair market value without paying capital gains tax.

Farm Impact

Any proposal to tax capital gains at death and eliminate stepped-up basis as a way to raise revenue for new government spending would be devastating to American agriculture and the broader U.S economy. Analysis by Texas A&M suggest these proposals would result in an average additional tax liability of $726,104 per farm for 92 of the 94 repre­sentative farms in its database. A separate study by Iowa State University suggests that if stepped-up basis were eliminated, a full-time farmer who owns just 358 acres of farmland would see his or her tax liability from a lifetime sale increase from $475,248 to $860,572, or a staggering 81% increase.

Additional analysis by EY shows that repealing the stepped-up basis would result in 80,000 fewer jobs annually for the first 10 years after repeal and a reduction in U.S. GDP by approximately $10 billion annually.

Protecting the stepped-up basis tax provision is vital to ensure the next generation of farmers and ranchers can continue feeding, clothing and fueling the world.

Our Position

Eliminating stepped-up basis, whether by tax at death or carryover basis, will hurt family-owned businesses, including farms and ranches, and limit job creation. In the U.S. today, many family farms are third, fourth, fifth generation – sometimes more. It would be unreasonable to ask a young farmer who inherited land purchased by great grandparents or great, great grandparents to pay taxes on the amount the land has increased in value over multiple generations. Some family farms go back to the turn of the century. Imagine asking a farmer to pay taxes on the increase in land values from 1900 to 2021.

Repealing stepped-up basis by imposing capital gains taxes at death would force many family-owned farms and ranches to liquidate assets to pay the taxes. This new tax would be imposed on top of any existing estate tax liability, essentially creating an unthinkable second tax at death.

AFBF supports maintaining the stepped-up basis in its current form.