Right. So they don't get the step up in basis without actually paying the tax. Still, having to pay capital gains is likely only 15%. It sucks (and I don't agree with it for a variety of reasons) but I don't think it will force many people to sell that would otherwise hold onto the land.
Let’s say you inherit 600 acres of prime Iowa farmland. Your dad bought it 40 years ago at $900 an acre. It’s worth about $9k an acre now. You want to farm and make a living doing so, so you have no plans to sell any of it. In fact you really can’t sell any of it because 600 acres is pretty marginal for making a living. Under the rules as they are now, you get a step up in basis and no taxes of any kind if you don’t sell. Under what might happen and is being talked about, you get no step up in basis and owe capital gains tax upon transfer. Your dad got the property for $540k. It is now worth $5.4 million. You owe taxes on $4.86 million. At 15% that is $729,000. At the talked about 39% the Biden administration is possibly proposing $1.53 million. Either sum would force most people to sell at least a portion of the farm which would make it non-viable as a way to make a living. May as well sell it all then.
This is absolutely true, but it clearly shows how horrible farming is as a use of capital. Were someone to sell and invest that $5.4 million at the average rate for the last 100 years (which is over 11%), it would create an income of more than $500,000 per year. Few, if any, farms realize that net, or come even close to half that, meaning the farmers, in effect, are paying $300,000 or more per year for the privilege to farm.
I know, I know, that's an over simplification, ignoring value gains of the farms among others, but it's still too close to the truth to be comfortable.
