Biden Plan Would Limit Longstanding Tax Break Used by Farmers
May 06 2021 - 10:51AM
Dow Jones News
By Will Parker
President Biden has said his tax proposals would make big
business and wealthy investors pay their fair share.
His package would also likely deliver a blow to American farm
owners by limiting a longstanding tax break. The provision allows
landowners to defer paying capital-gains tax when they sell
investment property and put the proceeds toward the purchase of
other real estate.
Farmers for generations have used the tax break to cheaply and
quickly relocate farm operations to lands with better soil,
diversify the crops they grow and consolidate land holdings. Some
have used it when exiting the farming business at retirement. Farm
owners in 2012 held 915 million acres, about 40% of the land in the
continental U.S.
Farmers were hit four years ago when the Trump administration
narrowed the use of this tax deferment, known as a 1031 like-kind
exchange. The provision, named for a section of the tax code, used
to apply to many types of personal property, including farm
equipment and livestock. Farmers exchanged their old tractors and
upgraded to newer and better ones without having to pay tax on
their trade-ins.
The 2017 tax law under President Trump eliminated 1031 exchanges
for everything but real estate.
"That has been a very hard change," said Kalena Bruce, a
fifth-generation cattle rancher near Stockton, Mo., where she and
her husband oversee a 300- acre ranch. "We still have to make
improvements to our herd, still have to make improvements to our
machines."
Farmers and land brokers said the latest proposal, capping the
profits from land sales that can be tax-deferred at $500,000, would
add another burden on farming.
Mr. Biden's proposal would also raise the top capital-gains tax
rate that land sellers would have to pay to 43.4% from 23.8%. It
would impose capital-gains taxes at death on appreciated asset
gains, a change farmers worry will make it difficult to keep land
in the family. However, the Agriculture Department has said the
plan would exempt farmers from those taxes at death, if the farm
remains both owned and operated by family members.
Kristine Tidgren, director of the Center for Agricultural Law
and Taxation at Iowa State University, said tax exceptions such as
1031 have allowed farmers, who often endure long periods without
income between harvests, to retain as much cash on hand as possible
for their operations. "Farming is very cash-poor," she said.
"Without a lot of these tools, you wouldn't really be able to
function in that sort of environment."
Some aren't convinced that land and real estate should enjoy
primacy over other types of assets in the tax code.
"It's a very special treatment," said Chuck Marr, senior
director of federal tax policy at the Center on Budget and Policy
Priorities, a think tank.
He added that the case for removing land's treatment in the tax
code has historically enjoyed some bipartisan support. Dave Camp, a
Republican, proposed eliminating the tax break in 2014 when he was
a Michigan congressman.
On paper, 2020 looked like a good year for farmers. Net farm
income topped $120 billion, the highest level since 2013, according
to an estimate from the U.S. Agriculture Department.
Farmers last year received $46.5 billion in federal aid, which
was a much higher than normal share of gross income on farms,
according to an analysis from the American Farm Bureau Federation.
Crop and livestock product sales decreased in 2020 from the prior
year, according to the lobbying and trade group.
Ms. Bruce, the Missouri cattle rancher, said she has never used
a 1031 exchange for land, adding that eliminating the ability to do
so in the future is a serious concern. As urban districts encroach
on farmland, local governments can sometimes change environmental
or public-health regulations that hamper agricultural activity, she
said.
Ms. Bruce might use a 1031 exchange to buy land where
regulations are more conducive to farm activity. "To think about
relocating, if we need to think about selling a piece of the farm
because it's now surrounded by a new subdivision...we need that
tool in our toolbox."
Write to Will Parker at will.parker@wsj.com
(END) Dow Jones Newswires
May 06, 2021 10:36 ET (14:36 GMT)
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