Possible Ag Tax Law Changes in Build Back Better Bill
Ranchers, farmers, and small business owners have had an interesting and challenging couple of years as 2021 rolls out. They have had to deal with COVID, shutdowns, supply shortages, and significant inflation in almost every area of business. If those were not enough challenges, the Build Back Better Bill that is being debated in Congress has some tax change proposals that will affect almost every business, and especially ag. None of these are final yet, and some may never happen, but be watchfuli.
Estate Tax (Death Tax) Proposed Changes
Under current law set to expire in 2026, a person may transfer a total of $11.7 million through their estate without tax liability. It would revert back in 2026 to $5 million per person ($6 million inflation-adjusted).
The proposed change in the bill that passed the House and is to be negotiated in the Senate is to the date for reversion, now to be January 1, 2022. There would then be a 40% tax on the value over $5 million that must be paid within nine months of the death.
This change if passed would have a large impact on ranchers, farmers, and business owners who can have substantial value in their land, buildings, and businesses that they want to pass on to their heirs at death.
Holding a property over a long period can result in a significant increase in value due to appreciation and other factors. When it is sold, the gains/profits of the sale are taxed at the current capital gains rate.
When a property is inherited, the tax situation changes considerably. All accumulated profit when sold is no longer considered. The heir inherits the property at the value on the day of the death of the estate holder. This is known as the “step-up” in basis or value of the property. The elimination of this tax advantage will have a huge impact on ranchers and farmers. Their properties have often been held for decades and have appreciated in value many times over their original cost. Heirs would have to take out mortgages or sell the properties if the stepped-up rule is eliminated.
1031 Like Kind Exchange
Though not currently in the bill, there have been discussions in both houses of Congress related to doing away with the 1031 Exchange. This tax advantage is realized when an investor or property owner who sells one piece of property and buys another like kind property. They are allowed to defer capital gains taxes on the transaction’s profit if any.
- Farmers or ranchers who sell some property/land to buy other land/property for their farm or ranching operations can defer capital gains on the sold piece.
- Real estate investors build large portfolios of rental properties using the 1031 Exchange to sell rentals and buy more or larger properties to grow their assets.
If the 1031 Exchange is eliminated or is capped at $500,000 as Pres. Biden suggests, it would have a major effect on property transfers and investment activity.
The conclusion to draw from these possible changes for 2022 and beyond is to be watchful of their discussion in Congress and consult with tax advisors about how these changes, if enacted, would change your tax situation or planning.