By Aeric Reilly, Southeastern Montana rancher.
It is no secret that family farms face tremendous challenges right now. Corporate monopolies, a changing climate, rising health care costs and a lack of capital are just a few of the obstacles that today’s farmers have to navigate to stay on the farm.
As a Montana rancher, I have to keep focused on the challenges that farming and ranching families face right now face right now, but I also have my eye on emerging perils that could threaten the family farmers of tomorrow. One of these perils is a series of tax proposals that Congress will consider over the next few weeks that could prevent farmers from passing farmland to the next generation of family farmers.
At the center of these proposals is a plan to eliminate stepped-up basis from the tax code. Stepped-up basis allows Montana farmers to pass land on to their heirs without saddling those heirs with a huge tax bill for capital gains. Because of stepped-up basis, a family that inherits farmland is only responsible for taxes on increases in capital gains from the day they inherit the land and not on the farm’s increase in value since the day it was originally purchased, which in Montana could be decades ago.
Today, capital gains taxes on the stepped-up value of a farm are only paid if and when heirs sell the farm. Proposals in Congress would change this too. These plans would not only eliminate the next generation’s ability to “step up” the capital gains value of a farm they inherit. They would also require an estate to pay capital gains taxes on farmland when the landowner dies.
The top capital gains tax rate paid by some farm families could be double what it is today too, as Congress is also considering increasing that tax rate too. Given the spike in Montana farmland value, it is not an exaggeration to think that many families would have to sell part or all the land they inherit just to pay taxes.
To be fair, it is important to note that farmers are not the intended target of these plans. The doubling of the capital gains rate and elimination of stepped-up basis are part of a tax proposal in Congress designed to target the ultra-rich. The idea is to make sure wealthy investors pay their fair share in taxes. The problem is that these proposals ensnare family farmers, too.
To assuage farmers’ fears, there is talk in Washington, DC, of exemptions and other special rules for family farms. But, it can take years of amending to get carve outs rights. In the meantime, precious family farmland could be lost.
In the fight to protect stepped-up basis, there is one piece of good news for Montana farmers and ranchers. We have an important ally in one of our own, Montana Senator and farmer Jon Tester. In June, the Wall Street Journal reported Senator Tester’s conviction that the proposal is a “nonstarter” for him. Farmers across America need Senator Tester’s colleagues to come around to his position.
Today’s family farmers are a resilient bunch. In just the last few years, they have survived trade wars, weather events and a national pandemic. Some of these challenges will persist for years to come, but if Congress follows Senator Tester’s lead, the next generation of family farms will have one less obstacle to overcome.
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