Stepped Up Basis

Amy Timmerman - Extension Educator Author

09/16/2024 Added

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A key consideration in estate planning is the transfer of assets to the next generation as 98% of farms are family owned and operated.

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[00:00:00.000]This is Amy Timmerman with Nebraska Extension and this weeks Ag Update.
[00:00:05.211]A key consideration in estate planning is the transfer of assets to the next generation as 98% of farms are family owned and operated.
[00:00:14.840]Additionally, active operators or retired farmers own 75% of U.S. farmland.
[00:00:20.800]As the average age of an operator increases, there is going to be a large transfer of farmland and
[00:00:26.580]other assets in the future whether by gifting, selling, or passing the farm to the next generation through inheritance.
[00:00:33.040]Stepped-up basis is a tax provision that allows the value of an inherited asset
[00:00:38.580]to be adjusted to its fair market value at the time of the original owner's death.
[00:00:43.460]This adjustment increases the asset's basis, which is the value used to
[00:00:48.520]determine capital gains or losses when the asset is eventually sold by the heir.
[00:00:52.800]By stepping up the basis to the asset's current market value,
[00:00:56.620]any appreciation that occurred during the original owner's lifetime is not subject to capital gains tax.
[00:01:02.854]Potentially reducing the tax liability significantly for the heir upon the sale of the asset.
[00:01:08.520]Although long-term capital gains are taxed at a lower rate relative to other types of income,
[00:01:14.840]the rapid appreciation of agricultural assets over someone’s lifetime make them a concern for
[00:01:20.800]people looking to sell assets in retirement or people inheriting farm or ranch assets.
[00:01:26.520]This provision is particularly relevant for assets such as real estate and other capital asset
[00:01:32.560]investments such as stocks, mutual funds and bonds that may have appreciated in value over time.
[00:01:38.440]The tax basis of land is determined by the amount originally paid for it - or its value at the time it was inherited -
[00:01:45.260]plus any improvements made to the property by the current owner, minus any depreciation on improvements.
[00:01:52.920]What about the death of a first spouse?
[00:01:55.740]When married couples own property as joint tenants, after the death of the first spouse,
[00:02:00.720]the surviving spouse would receive a stepped-up basis on 50% of the assets.
[00:02:06.940]What assets qualify?
[00:02:09.680]Current law not only supports the stepped-up basis for grain, livestock, machinery and land, but also for prepaid assets on hand.
[00:02:18.960]At someone’s death, it may be important to begin collecting price data on these items.
[00:02:23.926]Sometimes, it is difficult to find this information months (or years) after the fact.
[00:02:30.100]What If I inherited land (or other assets in the past), and now want to sell.
[00:02:34.960]Where do I find the basis?
[00:02:37.320]On inherited property or assets, the fair market value of the property should be documented as of the date of inheritance.
[00:02:45.120]Having an appraisal done at the time real estate property is inherited establishes the new or stepped-up basis.
[00:02:52.480]For other investment assets, keeping documents, and published market data would assist in establishing a current market value.
[00:03:00.360]If a taxpayer cannot prove the basis, the IRS has the right to say it was zero.
[00:03:05.020]For land, if there is no documentation of value at time of inheritance, a reasonable estimation using records
[00:03:13.280]such as USDA-NASS Census and Survey land values or other credible sources can be used, although not preferred.
[00:03:21.980]Nebraska is one of the six states that has an inheritance tax.
[00:03:26.000]When Nebraskans inherit land or other property, they must pay inheritance taxes to the county where the property is located.
[00:03:34.060]The value of assets needs to be equal to what was put on the inheritance tax return.
[00:03:40.040]A stepped-up basis can be seen as an ideal opportunity to sell long-held farmland or other assets that have appreciated in value,
[00:03:48.880]with minimal to no capital gains tax consequences if the next generation or heirs choose to sell
[00:03:56.420]all of part of the inherited property soon after the stepped-up basis is established.
[00:04:01.540]The impact of a stepped-up basis on each farmer or rancher depends on specific circumstances.
[00:04:08.200]Utilizing an estate planning team that includes professionals such as an attorney, accountant,
[00:04:13.540]and financial and/or insurance advisors can help when developing an estate strategy.
[00:04:18.812]If you have any additional questions about estate planning and strategy, please reach out to your local extension office.
[00:04:25.292]This has been Amy Timmerman with Nebraska Extension.

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