WASHINGTON, Jan. 21, 2015 – President Obama’s proposal to eliminate the stepped-up basis for inherited property won’t go anywhere in a Republican Congress. But the plan will at least highlight an idea that could help expand the land market for beginning farmers, said Ferd Hoefner, Washington policy director for the National Sustainable Agriculture Coalition.
“Stepped-up basis locks in investment in farmland that might otherwise be sold, so it keeps the supply of land on the market down and prices up, forming a barrier to new farming opportunities,” Hoefner said.
The term refers to the readjustment of the value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the asset’s value is determined to be its worth at the time of inheritance, not the value at which the original party purchased the asset.
But Roger McEowen, an agricultural tax expert at Iowa State University, said the $200,000 exemption that Obama is proposing “wouldn’t go far” and the capital gains tax would amount to an alternative of traditional estate taxes from which they would otherwise be exempt. The proposal is so far reaching “it signals that the White House won't work with the Congress on anything,” McEowen said.
The White House said in a summary of the proposal that provisions meant to protect heirs of small businesses from having to sell out to pay the capital gains liability would ensure only a “small minority” would be affected. The heirs wouldn’t have to pay the tax until the business is sold and could opt to pay the liability over 15 years.
Sen. Charles Grassley, R-Iowa, called Obama’s proposal “confiscation.” Much of the land in his state was purchased for $1,000 or less per acre, he noted. Farmland purchased at the peak of the farm crisis in the 1980s was worth $787 an acre, on average. The average value was $7,943 an acre in 2013, according to an Iowa State survey, and Obama’s plan would tax the difference.
Hoefner said the small business protections would limit what he considered a positive impact on the land market. Still, with few farms paying estate tax anymore, “the issue of carry-over versus stepped-up basis becomes all the more relevant and worthy of debate,” he said.
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