There is a bill awaiting its turn to be voted on in Congress that is causing concern among some family-run farms and ranches and those organizations that represent them. If passed, the new law will alter a tax shelter that is protecting certain beneficiaries who inherit property.
Agriculture is an industry that is absolutely vital to our economy and survival, which is why there are tax shelters in place to protect our nation’s farmers and ranchers from the financial burden that would be cast on them should they have to pay high capital gains taxes on family land that is passed down.
Unfortunately, there are those who will look for loopholes to take advantage of a tax shelter to receive illegitimate, or even fraudulent, exemptions. The government is tasked with finding ways to protect its citizens for whom these exemptions were created, while simultaneously preventing people from benefitting dishonestly.
While it’s understandable that our government would want to enact legislation to prevent this, there could be unintended consequences to farmers and ranchers.
Currently, they are protected under a step-up in basis provision. Without this provision, even farmers who inherit land that has been in the family for generations might have to pay a capital gains tax based on the value of the property at the time of inheritance.
“The step-up in basis provision adjusts the value, or ‘cost basis,’ of an inherited asset (stocks, bonds, real estate, etc.) when it is passed on, after death. This often reduces the capital gains tax owed by the recipient,” according to the Tax Foundation, an independent tax-policy 501(c)(3) nonprofit organization.
“The cost basis receives a ‘step-up’ to its fair market value, or the price at which the good would be sold or purchased in a fair market. This eliminates the capital gain that occurred between the original purchase of the asset and the heir’s acquisition, reducing the heir’s tax liability.” Visit www.taxfoundation.org for more information.
While some of the wording in the bill continues to protect ag-related businesses, some organizations continue to have concerns should this bill pass as written. Texas Farm Bureau, for example, has put out an action request for people to express their concerns to congress. Their website urges, “We have reached a critical point in the tax debate in Congress and it is extremely important for you to reach out to your U.S. Representative and Senators to fight against negative tax proposals.” To answer this call, or for more information, go to www.votervoice.net/mobile/TXFB/Campaigns/ 88229/Respond.
Our economy depends on farmers, ranchers
It’s true that paying a tax, even a high one, on inherited land may not be a huge loss for those who do not intend to use the land for commercial farming or ranching. But for the many people who do still depend on their land for income, and to provide food for themselves and those who work in other professions, there can be a direct impact.
There is also the argument that this bill should not cause concern because it only effects “large” farms. There is the presumption that larger farms should be able to pay that tax. But the reality is this: Land that is passed down through inheritance has value, but is received in a form other than money. The property value could raise the adjusted gross income of the beneficiary, which could increase the amount of taxes owed to the IRS—and those taxes must be paid in the form of money. Those who do not have a large enough sum of money to pay the taxes must acquire the funds elsewhere.
For some, the only option would be to sell off assets which might include equipment used in the business, the livestock the business is centered around or even the land itself.
The obvious result could be an end to an already-established and functioning business. This may not only affect the family, which may extend throughout several branches of the family tree, but could also affect the local economy and beyond—anyone who purchases products produced on that land, whether directly or indirectly.
In a letter to Representatives Chuck Schumer, Nancy Pelosi, Mitch McConnell and Kevin McCarthy, dated Sept. 7, 2021, the American Farm Bureau Federation stated, “Our farmers and ranchers persevered through many years of low commodity prices and more recent market shifts and challenges to keep food on the shelves during the COVID-19 pandemic. As the country and economy begin to regain their footing, we should not undermine the long-term risk management tools agriculture depends on or raise taxes on the backs of the farmers and ranchers who grow the safe, sustainable food supply we all rely on.”
The full letter can be accessed at www.fb.org/ files/AFBF_ Reconciliation_ Letter_ to_ Congress.pdf.
A local farming family’s legacy
Besides the economic impact on individuals, families, businesses and communities, there is another question. What is the value of the years of history, culture, heritage and family tradition intermingled with passage of the deed to that land?
The Royal family in Verdi, for example, has family land that can be traced back four generations. As far back as the 1800s, William Barton Fuller was buying, selling and trading land. Through multiple inheritances, the family has acquired property from both sides of the family.
Betty (Royal) Rackley recalls stories that have been passed down in her family over the years. One of them is set in a piece of the property the family refers to as the Fuller Place. They would hire young men to work on their farm and, on many occasions, Rackley’s greatgrandmother, Rebecca, would gather the young men together on the porch for Bible studies.
One of those young men was Rackley’s grandfather, Frank Royal, who married Rebecca’s daughter Lottie Fuller. Together they had Rackley’s father, Ned Royal, a name well-known and respected by many in the Verdi and Pleasanton area today. Parts of that land are still run by Rackley’s brother, Lee Royal and his son, Carl, where they produce cattle as well as peanuts, corn, peas and other commodities.
Any changes made by this bill will go into effect at the beginning of 2022. There are ways to be proactive in protecting family land and agriculture-related businesses.
In addition to contacting congress and voicing concerns, those affected are urged to start speaking to a tax professional about options, things that can be done now, to protect their assets should this law pass.