Tax Reform: Section 1031 Exchanges and the Estate Tax

Posted on 09/28/2017 3:27 PM


As 2017 nears its end, tax reform chatter is ramping up. Keep tabs on discussions around Section 1031 tax-deferred exchanges and the estate tax, says Paul Neiffer, a CPA and principal at CliftonLarsonAllen and author of the blog “The Farm CPA.”

Section 1031 allows landowners to sell less productive farmland, roll that gain into new farmland and defer the tax. If the owner passes away owning the property, the deferred gain will disappear.

“Under tax reform, landowners may have to pay tax upfront and have less cash available to roll over,” Neiffer explains.

Assume a farmer sells a quarter section for $1 million with a cost basis of $250,000. The farmer purchases new farmland for $1.5 million. Under current law, the farmer reports no gain and his basis for the new land is $750,000 ($1.5 million minus the deferred gain of $750,000). Tax reform would require the farmer to pay tax on the gain of $750,000.

Estate Tax Changes. Today, farm couples worth up to $11 million do not owe federal taxes, and when a person passes away, his or her heirs get a step-up in basis on most assets.

With tax reform, Congress would like to kill the estate tax, curtail or remove step-up in basis or have a capital gains tax at death, similar to the Canadian system, Neiffer says.

While estates valued more than the $11 million threshold can owe significant tax, with planning and time, you can usually reduce or eliminate the estate tax, he explains.

Eliminating the step-up in basis has bigger ramifications. The step-up in basis means your cost basis during life becomes irrelevant when your heirs receive your assets. “They are able to adjust their ‘tax’ cost basis to the value of farmland and other assets at the time of your death,” Neiffer says.

Most farmers under current laws will never owe any estate tax, Neiffer points out, but almost all farm heirs benefit from the step-up in basis.


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