How Would the Proposed Capital Gains Tax Increase Impact Landowners?

In President Biden’s Fiscal Year 2025 budget proposal, a significant increase in the capital gains tax rate is proposed, potentially rising to as high as 44.6% for individuals with taxable incomes over $1 million and investment incomes above $400,000. This targeted change would affect a segment of landowners—those with profitable operations and/or highly valued land.

For these landowners, the increased tax could discourage selling, as the financial burden from capital gains would reduce the appeal of liquidating assets. This might lead to reduced turnover in high-value farmland markets, potentially impacting land prices and influencing longer-term holding strategies. Owners might need to adapt by exploring advanced estate planning or reevaluating investment strategies to mitigate the tax consequences.

The IRS 1031 Exchange is one effective tool to defer capital gains taxes by reinvesting property sale proceeds into “like-kind” real estate. But for those looking to trade their equity for cash, the increased capital gains tax could significantly change the net income received from the transaction. Often, aging landowners opt to sell farmland to make it simple for their kids when they pass away by just dividing cash instead of an ownership interest in farmland. With a 44.6% capital gains tax, aging landowners may opt to transfer the land upon their death so the heirs can benefit from a “stepped-up basis” which would mitigate the taxable gain. That way the heirs can realize a much higher net income from the property sale if they choose to sell.

If you are a farmland owner or an individual looking to purchase land in the future, follow these proposed tax changes closely. If you know that you will need to sell land in the future, make sure you talk to a tax advisor or accountant that understands these implications. After speaking with your tax advisor or accountant, if you decide now is the right time to sell or look for a replacement property, find us on www.acrepro.com and find an agent in your area.

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