Taxing Death to Pay for More Government

Farmers and ranchers depend on their land to produce food, fiber and fuel for the world. Many spend a lifetime slowly paying off their property so their children can one day farm it.

Today, owners can usually pass farmland down to their families without burdening them with huge tax bills. New proposals in Washington could change that, taxing families because of a loved one’s death.

To pay for some of his trillions of dollars of new federal spending, President Biden is seeking to nearly double the Capital Gains Tax to as high as 39.6 percent. But another part of the plan could be even worse. President Biden has proposed making Capital Gains Taxes due at the owner’s death instead of when the property is sold. He would also eliminate the “Stepped-Up Basis” for inherited property, which could be devastating for farm and ranch families.

While short on details, President Biden’s proposal suggests he would defer the Capital Gains Tax on farms if the land remains in the family. The plan may defer the due date on this massive new tax bill, but it does not exempt farmland from the tax. This ticking time bomb hovering over the new owners’ heads would make it much harder to run a financially profitable farm.

Capital Gains and the Stepped-Up Basis

When a person buys property and later sells it for more than he or she originally paid, the increased value is known as a “capital gain.” Today, capital gains on property held longer than a year are taxed at up to 20 percent.

For example, if a couple bought a 100-acre farm for $500 per acre, the total cost (or “basis”) would be $50,000. If they later sell it for $2,500 per acre, for total sale of $250,000, the property’s “capital gain” would be $200,000.

$250,000 sales price
– $50,000 basis
$200,000 gain

Today this gain would be taxed at up to 20 percent, for a $40,000 tax bill.

If the owners die while owning the property, it is passed down to their heirs. However, their basis in the property is not passed down. Rather, it is recalculated (or “stepped up”) to the fair market value on the date of death. This gives their heirs a fresh start, as they will only pay taxes on the amount the property increases in value during their ownership.

Stepped Up Basis has been the law for decades. It avoids recordkeeping problems resulting from property bought long ago by people no longer living. It provides a fresh start for young and beginning farmers just inheriting a piece of family property. It is also a matter of fairness, wiping away “gains” in property value more accurately ascribed to inflation.

If a young farmer is required to keep his or her grandparents’ or great-grandparents’ basis, the overwhelming cost of the Capital Gains Tax would keep many new owners from ever selling their property. The chilling effect on the land market would make it nearly impossible for new farmers or ranchers to break into the industry. Also, the vague exemptions proposed by the Biden Administration are cold comfort for those looking a huge new tax liability in the mouth.

The New Death Tax

The Biden proposal deliberately avoids increasing the Estate Tax, known to farmers and ranchers for decades as the “Death Tax.” Leaving the Estate Tax untouched was a political decision, driven largely by the fact that farm and ranch families have been loud and clear about the unfair impact an increased Estate Tax would have on them.

Rather than face the political firestorm that jacking up the Estate Tax would cause, Biden has creatively proposed making the Capital Gains Tax due on death. This is pure sleight-of-hand meant to tax death without technically changing the Death Tax. It is a tax on death, plain and simple. If you die while owning assets, your heirs will owe a tax.

Farmers and ranchers spend their entire lives doing hard, manual work in harsh conditions. They pay income taxes on every dime they make, then use some of what’s left over to pay for land and machinery. Taxing these assets again upon death results in double taxation and discourages saving and investing.

Taxing death is not only bad economics, it is simply wrong. Farmers and ranchers should be able to pass their land and equipment on to the next generation without the government taking a huge slice of the pie. A Death Tax by any other name would smell as rotten.

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