The Biden administration is suggesting certain changes to the tax code that will end the concept of generational land ownership and be the final killing blow to the already struggling family farm. The three main changes are the removal of the “step up” basis, dropping the tax exempt amount from 11.8 million down to one million, or 2.5 million for married couples, and taxing these unrealized assets at a rate of 39.6%.
What is the “step up” basis? It is valuing a property at current values. This means heirs are taxed based on the current value of the property. Many in this administration tout this as a loop hole that allows the wealthiest of Americans to get out of paying their fair share of taxes. So what does it look like when this is removed?
I live next to a family farm that’s about 2700 acres that have been acquired over three generations. For this example let’s say the first generation purchased all 2700 acres from the beginning. Average ag land prices were around $60 per acre. Today’s value is about $4100 per acre that’s an unrealized asset of $4040 per acre. So for 2700 acres that’s an unrealized asset of $10,908,000. Minus the, at most, $2.5 million exemption leaves a tax liability of $8,408,000. The proposed plan labels this as an income tax so depending on the farms income they will pay 35-39.6% on this liability that is due at time of inheritance. So that’s a tax bill ranging from 2.9 million to 3.3 million. And this isn’t including the current and real value of the property. It is simply the “unrealized” income in addition to the current value. There is a saying that farmers are land rich and cash poor, so if an heir doesn’t have the cash on hand, they have two choices, take out a loan to pay the taxes or sell off part of the farm. 99% of Wisconsin’s farms are family owned and operated. This would wipe out all of the ag in this state within a generation.
Let it be known, that the administration assures us that small businesses and family farms would not be subject to these taxes if the heirs continued said business. Horse feathers in my honest opinion, but only time will tell.
NOTE: Tax plan info is at the end of the fact sheet