Democrats’ massive Build Back Better bill not only protects stepped-up basis, it also includes a long-sought change in an estate-tax provision that could have far-reaching benefits for many farms.
Congress created the provision, known as Section 2032A, in 1997 to allow farm families to lower or eliminate their estate tax bill by reducing the value of their real property to reflect its use as farmland rather than its market value.
The problem is, that valuation reduction was set at $750,000 and indexed for inflation, putting the 2021 limit at about $1.2 million. But adjusting the cap for inflation hasn’t come close to keeping up with increases in the price of land. Farmland values have increased by 223% between 1997 and 2019, according to a study by the American Farm Bureau Federation.
Farm groups have been lobbying for years to get the limit increased, and finally succeeded when Rep. Jimmy Panetta, D-Calif., and other lawmakers inserted the provision in the bill’s revenue section to increase the 2032A limit to $11.7 million.
The change to the cap is paired with a cut to the individual estate tax exemption, and there are rules around the special-use valuation that can limit its overall benefit to heirs.
But tax experts say the higher cap will still help many farms and will offset the impact of slashing the estate tax exemption, something that’s scheduled to happen in 2026 regardless of what happens with the Build Back Better bill.
The existing limit is so low in relation to land values that the Section 2032 provision is “pretty close to worthless,” said Paul Neiffer, an agricultural tax specialist.
“A lot of farm operations are actually better off” under the Democratic legislation, he said. Even though the estate tax exemption would be cut by about $6 million, the value of the Section 2032 provision would be increased by about $11 million, he said.
Danielle Beck, senior executive director of government affairs for the National Cattlemen’s Beef Association, told Agri-Pulse the higher limit “does represent a meaningful opportunity for producers to potentially lower their estate tax burden, but there are a number of parameters around that provision of the code that really must be satisfied in order to effectively make that election and reap the full benefits.”
The changes in tax policy are far from being law yet.