Farmland owners may see tax hike from American Families Plan

By Kristine Tidgren and Wendong Zhang–Iowa State University Extension and Outreach

Ames, IA – The American Families Plan, proposed by the Biden administration in April, would provide new social programs to millions of U.S. households. To cover the $1.8 trillion benefits package, the Administration has proposed significant tax changes.

According to a new Iowa State University study, some of Iowa’s farmland owners could face a substantial increase in taxes to pay for the proposed plan. “Because of the proposed increase in rates, we estimate that, on average, a full-time farmer owning 358 acres of farmland would see tax liability from a lifetime sale increase from $475,248 to $860,572, an 81% increase, or from 14.5% to 26% of fair market value,” said Kristine Tidgren, director of Iowa State’s Center for Agricultural Law and Taxation.

Wendong Zhang, an associate professor of economics at Iowa State’s Center for Agricultural and Rural Development, said that the study looked at 80% of Iowa’s farmland owners, including those that own land as sole owners, joint tenants, tenants in common, and through a revocable living trust. He said that they did not study other owners that own farmland in corporations, partnerships, life estates, or irrevocable trusts that could face new tax liability as well.

“Among full-time farmers with any ownership interest in a whole farm of 200 acres or more, we estimate that 62% of owners and 79% of acres would be impacted by the AFP tax at death or gift, even with a $1 million exclusion. That number jumps to 99% of owners and 98.2% of acres when the whole farm size reaches 500 acres or more,” said Zhang. These estimates are based solely upon the owner’s interest in farmland.

The authors said that the impact of the AFP depends upon farm size and appreciation. In that way, a small farm that has increased substantially in value since the owner acquired it may be subject to tax while a large farm that was recently inherited would not face the new tax.

Under the 100-year-old law, the basis of property transferred at death is adjusted to current value in the hands of the heirs. Called the “step up in basis,” this adjustment means that gain accruing during an owner’s lifetime is not taxed if the property is transferred at death: “The AFP proposes taxing those who die with gain greater than $1 million. So the first $1 million would still receive a tax-free step up in basis, but the rest would receive the step up only after paying the tax,” Tidgren said.

Tidgren said that the proposal includes a deferral for family owned businesses that pass the business or farm to a family member who continues to operate it. “This would apparently be a delay in payment of the tax, not an exemption from the tax. The impact of the deferral is dependent upon definitions and details that have not been released,” she said. For those required to pay the tax, the proposal suggests a 15-year payment plan, “but if they can’t cash flow that, they would have to sell,” Tidgren said.

The authors noted that 83% of farmland owners would not be impacted by the proposed tax solely because of their ownership in farmland. This is largely because most Iowa farmland owners own fewer than 200 acres. However, ownership of other assets could still make the proposed tax affect those landowners. “Farmers also own many assets other than farmland and buildings—livestock, machinery, grain in the bin, etc. We did not consider these assets because we did not have specific data about them, and it is not clear how the proposal would treat this other property,” Zhang said.

For now, the authors said, the AFP is only a proposal, and no current laws have been changed. “Most legislation doesn’t pass as proposed and we still have no proposed legislative language. These proposals, however, are significant, and farmland owners should begin watching the progress of any legislation in Congress. More specific proposals should be unveiled mid-September,” Zhang said.