Are you ready for capital gains tax at death?

Paul

Neiffer: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we have Paul Kneifer with us, and we're going to talk tax law and some proposals that we're hearing from the Biden administration. How's it going, Paul?

Paul

Neiffer: Doing great. I think most everybody knows by now, but I recovered from COVID I actually had a 2-week period where I had about 101 to 104 fever, so, but I'm back to normal, and, and it feels good to have that behind me.

Chris

Barron: I imagine so. You know, it's actually a real thing then, right? Now that you've lived it?

Paul

Neiffer: For me, it was real. It was, uh, it was definitely real. Uh, and you could ask my wife the same thing. She would definitely chime in that it was real.

Chris

Barron: And then she didn't get it?

Paul

Neiffer: No, no, she had 4 different tests and was negative all 4 times.

Chris

Barron: Wow, that's, that's awesome. That's good that she didn't get it. So, well, we're glad that you're, you're, you're back to health here again because we need you and your expertise on this tax stuff. And we're starting to hear— and I know I had sent you a column that I had seen about the Biden tax proposals and looking at, you know, capital gains tax increases and estate tax discussions and stepped-up basis not being allowed and all kinds of crazy things. So I want to start out just by having you kind of go through some of the assumptions or some of the things that you think that is really out there and what maybe some of the proposals that in reality might be looking like.

Paul

Neiffer: Well, I, I think for sure we're going to see a reduction in the lifetime exemption amount. Now, right now it's almost $12 million. It's not quite there. It is scheduled no matter what under current law to drop back to about $6 million starting after 2025. Um, I, I think the Biden administration— I don't think it's that big of a priority for them to necessarily drop that any quicker. But what I think is out there that is certainly on the table is either eliminating the step-up in basis at death or a capital gains tax when you pass away. Now, if you have a capital gains tax when you pass away, you are going to have a step-up in basis because it's going to get stepped up to that amount that, that you paid tax on. Um, but, you know, I, I think either one of those is definitely in the flux right now. Both Biden and— we know Senator Wyden, and it's important to know Senator Wyden.

He's the lead person for the Senate Finance Committee. He's from the state of Oregon. And he is definitely a proponent of taxing increases in net worth during your lifetime, not at death, but during your lifetime. So with him being in control of the Senate Finance Committee, which is probably the most powerful part related to taxes— it's more powerful even than the president at times, and certainly more powerful in my opinion than the House Ways and Means Committee. Likely we are going to see some major changes in capital gains. Now, you know, Biden has proposed that if your taxable income is over $1 million and you have capital gains, you know, above that million-dollar level, that you'll be taxed at the regular ordinary income tax rate. I don't know if that's going to happen, or if it does, it might be a higher amount.

That's not going to affect too many of our farmers out there, uh, because certainly they're typically not selling land during their lifetime, and, and a lot of the other assets are ordinary income assets anyway. So I, I think the key thing to understand is there could be a capital gains tax, but likely what I hear and what I read is it's really going to be on, on assets that can easily be liquidated cash, well not cash, but stocks, bonds, those type of assets, farmland and other farm assets, likely if there is some type of capital gains, it quote will be assessed at death, but it wouldn't be paid until the person disposes of the assets. So I think, you know, the horror stories out there right now in the magazines and so on, is that this is going to, you know, force families to get out of business, family farms to get out of business.

Likely that's not the reality because this tax really isn't going to be assessed until you actually sell the asset. While you're selling the asset, you're going out of business, you're electing to go out of business, but it would increase the cost of that family wanting to get out of the farm business. I think if you're going to stay in farming, I don't think this is going to affect you too much. But the one area where— go ahead, Chris.

Chris

Barron: Well, this is leading me to two questions. The first one's a little more minor, and then I'll get to the other one, stepped-up basis. But the 1031 exchange, is that still going to be in play then, you think, as far as, you know, moving stuff around?

Paul

Neiffer: Yeah, I think You know, Biden has sort of hinted, and I know the real estate lobbyist is a pretty strong lobby. I think we'll still be able to do 1031 exchanges on farmland assets. You know, they may curtail it above a certain amount of gain. We know Obama, I think, had proposed a $1 million limit. On your gain that you could defer. I could see something like that happening, but I think you'll still be able to do 1031 exchanges on farm real estate.

Chris

Barron: On the stepped-up basis, I mean, as I look at that and think about a lot of our clients, I mean, if you can't step up that value, that could put some people in sort of an economic hurt. I mean, talk to me a little bit about that. Talk to us a little bit about the about how that's going to work or how that might work?

Paul

Neiffer: Well, let's, let's look at if you have a corporation right now. So, and we know lots of, lots of your clients, lots of the readers and the listeners out there have farm assets in a corporation, right? Right now you only get a step-up in basis in the corporation. And if you never sell the corporation, you don't have a step-up in basis. Right now, if you're an individual and happens to own, let's say, $1 million of grain or $2 million worth of farm equipment, yes, your heirs get to step it up. They then can sell the grain tax-free. They can redepreciate the equipment over a 7-year period. Yes, that helps the heirs, but I, I don't see where it necessarily puts the heirs out of business. It is just a little bit more tax that at some point they are going to have to pay, but they likely have the ability to time when that tax is going to be owed.

I mean, farmers have been kicking the tax can down the road for multiple decades now, and that next generation under current rules— and I don't think those rules are going to change— still has the ability to kick that tax can down the road.

Chris

Barron: So what about on the land? I guess, I mean, if, if they— if the basis on the land is $3,000 or $4,000 an acre and the land is worth $10,000 an acre when somebody dies, how— I mean, how's that work?

Paul

Neiffer: Well, under current law, they get to step it up. Now, land we can't depreciate. So if you're never going to sell it or if you sell it using a 1031, really doesn't matter. I mean, the only time a land has value with a step-up is if the heirs are going to sell it or, you know, they're going to not do a 1031. You know, the proposal is that, you know, the heirs, if and when they sell it, are going to be stuck with the lower basis, right? And then they're going to owe tax on that $6,000 or $7,000 gain. But again, they're getting out of farming likely. They're paying a tax that the farmer would have paid during their lifetime. What Congress is upset about, and are parts of Congress, and what Biden is upset about are all these people waiting till they pass away because they know they get a step-up in basis and they eliminate the capital gains tax.

So I think people need to understand that there's enough pent-up— I won't say anger, but there's enough pent-up angst in Congress right now about all these people escaping tax completely. And with the fact that we have full Democratic control now in both the House, the Senate, and the presidency, likely capital gains tax of some type is going to be owed either at death or when the assets get sold, either via the fact that there is no step-up in basis or there's a deferred capital gain tax. So I think that's coming. Now, I think there'll be some exemptions. I think maybe the first million, first $5 million of assets, uh, they'll probably still allow the step-up or no capital gains tax. But after that, I think, uh, you're definitely looking at some tax.

Chris

Barron: The moral of the story is don't sell the land.

Paul

Neiffer: Right? Correct, correct, correct. If you don't want to pay the capital gains taxes, don't sell the land. Just keep farming. Yep. Yep.

Chris

Barron: Yep.

Paul

Neiffer: Okay, so what— And— Go ahead.

Chris

Barron: No, you go ahead.

Paul

Neiffer: Well, I think you're probably maybe going to ask what people should be looking at. I mean, likely any of these changes are going to happen in 2022. They're not going to be effective retroactive to January 1st, 2021. So we have about another 11 months this year to really be meeting with our advisors, whether it's me or somebody else, you know, meeting with your advisors and trying to decide, okay, you know, in the past we wanted to hold assets so we could get a step-up, you know, if that's disappearing, or especially if there's a capital gains tax at death, you know, maybe we should be transferring those assets now especially if you're in that— each person in the farm couple is in that $10 to $15 million range. They really should be thinking about doing some type of transfer.

Now they still need to make sure they maintain enough assets to live on, but the excess is— this is probably the time to consider gifting it or getting it transferred to the next generation or even the next generation after that.

Chris

Barron: Yeah. And is there any certain corporate structure or any way to put things together that makes sense over another way that you're aware of?

Paul

Neiffer: Or— Yeah. So especially with land, we like seeing the land in some type of a multi-member LLC that gets us a 30, 35, 40, 25 to 40% discount. You know, the the farm operation, if it's in a corporation or if it's in an LLC, that also gets us a discount. Now in the past, if we didn't owe estate tax, we really didn't want a discount because we got that big step-up. Now if the estate tax level is going down and there's a potential of no step-up or capital gains tax, then yes, having that big of a discount as we can and taking advantage of it this year, uh, probably in a lot of cases makes a lot of sense.

Chris

Barron: Gotcha. And that's one of the things, you know, we talk to a lot of producers and you help us with this a lot as far as just thinking about, you know, what's the best way to put your business together. Be thinking 10 years out, 20 years out, the next generation, what's things look like, and the gifting, and, and just putting your, your business structure together in a way that's most advantageous, but then also leaving some flexibility in the plan too. As well, right?

Paul

Neiffer: Yeah, yeah. Now, and, and we also need to remember that, you know, when we're dealing with farm structure, there's really about 4 key things we need to worry about. You know, we have the income tax situation that we're worried about, we have the self-employment tax, we have the estate or gift tax, which is really what we're talking about now. And then what we forget a lot of times, and that certainly has come up here with CFAP, is we have the FSA planning. I mean, we can structure, you know, we can come up with a great business structure and then oops, you know, instead of qualifying for $500,000 or $1 million of CFAP or whatever it might be, we're stuck with $250,000. So, so that it's holistic, it all comes together.

So that's, that's what you need to understand is, is structuring something that might be great for saving $5,000 a year in self-employment tax is going to cost you $100,000 or $200,000 of farm payments. So you have to understand how that all melds together.

Chris

Barron: Yeah, and I'd add a couple of things to that too, um, you know, looking at the rolling stock, the, the trucks, and as a separate entity, and the machinery as a separate entity, thinking of liability and clean accounting, because it's a lot easier for you to get a clean set of books that doesn't have a whole bunch of things miscoded and everything when it's tax time, isn't it?

Paul

Neiffer: Yeah, yeah. It's nice having it in a separate entity 'cause you're really treating it as really a separate business and you're not commingling all that stuff and you really get a true, like I say, a more true picture of what is our equipment costing us, what are our semi-trucks costing us. And you definitely do need to have those semi-trucks separate from everything else.

Chris

Barron: Right, so back to where we started, you know, just kind of looking at these proposals, it sounds like it's, you know, the sky is not falling. However, we need to probably pull up our bootstraps and start looking at the way our business is structured, look at the gifting, look at the level of value that we have. Anything else that we need to hit on that I didn't ask on?

Paul

Neiffer: No, I think you covered it. I think right now it's sort of what I call pie in the sky. It's just a lot of chatter out there, you know, as we get later. And likely anything that's going to pass in regards to this would be at the end of the year. Any major tax bill typically gets passed at the end of the year. Now, by saying that, there's already talk that Schumer and so on wants to bring back a full deductibility for state income taxes. That could get pushed through on the $1.9 trillion stimulus package, or whatever the size it ends up being. So, so certain things could get pushed through here earlier, but I think any major tax bills, especially with the pandemic still going on, will be later this year.

Chris

Barron: Sounds like we need to stay tuned then, right?

Paul

Neiffer: Yep, that's, that's the best way of saying it.

Chris

Barron: Yep. So sounds good. Well, Paul, this was a great conversation. And we will do that. We will stay in touch with you as things develop and let us know if we need to be aware of anything and appreciate your time. Thanks a lot.

Paul

Neiffer: You're welcome. Thanks, Chris.

Chris

Barron: Thanks everybody for listening. And we will catch you next time on the Ag View Pitch.