For a couple months we have speculated on what changes might be made to the capital gains tax.
This week, we got a preview of what Congress is planning. Rep. Bill Pascrell (D-NJ) introduced H.R. 2286, the Sensible Taxation and Equity Promotion (STEP) Act in the house and Sens. Chris Van Hollen (D-MD), Cory Booker (D-NJ), Bernie Sanders (I-VT), Sheldon Whitehouse (D-RI) and Elizabeth Warren (D-MA) introduced similar legislation in the Senate. These coincide with the announcement of Pres. Joe Biden’s infrastructure package and will be used to offset the additional expenditures.
The proposed bills treat property that is transferred by gift or at death as if it were sold for its fair market value. This ‘deemed sale’ causes a recognition of gain, the amount that the asset increased in value while owned by the decedent, that is subject to capital gains taxes. This new capital gains tax at death would be applied on top of existing estate taxes – so that both the new capital gains tax and existing estate taxes would be collected when a farm or ranch owner dies. At death, there is an exclusion of the first $1 million of gain and transfers to a spouse would be exempt.
Typically, capital gains are taxed when an asset is sold. Under current law, however, transfers at death are not treated as a sale and the capital gain is not taxed. In addition, the basis of the property is ‘stepped up’ to current value so that if the property were sold, capital gains taxes would only be paid on appreciation since the property was inherited.
Transfers of illiquid property such as farms and certain farm assets would be allowed to pay the tax over a 15-year period. It would be ‘interest only’ for up to five years and then 10 equal payments for the remaining 10 years. Selling the property would require payment in full. There would be a lien attached to any property, which would probably prevent you from refinancing the property without paying off the loan to the Internal Revenue Service.
The value of family-owned farms and ranches are tied to illiquid assets such as land, buildings and equipment. With a majority, 82 percent, of farm assets in illiquid farm real estate, producers have few options when it comes to generating cash to pay taxes at death.
When taxes at death on an agricultural business exceed cash and other liquid assets, surviving family partners may be forced to sell land, buildings or equipment needed to keep their businesses running.
This not only can cripple a farm or ranch operation, but also hurts the rural communities and businesses that agriculture supports. The harm caused to agricultural businesses that comes from taxes imposed at death is multiplied when both estate taxes and capital gains taxes are imposed.
WFBF and AFBF are opposed to legislation that would end the stepped-up basis and impose capital gains taxes at death. WFBF President Kevin Krentz has met with Wisconsin’s federal delegation and this has been one of the main issues he has discussed.
WFBF will continue to work with our federal delegation to oppose legislation that would eliminate the step-up basis and ask that you contact your federal congressional representative and ask them to oppose H.R. 2286.