American agriculture is speeding toward a crisis of continuity—much of our nation’s farmland will soon need a new farmer. Farmers and non-operating landowners aged 65 and older own 41 percent of farmland and ranchland in the U.S. Over the next two decades, these aging landowners will face tough choices over how and to whom to transfer the 370 million acres of agricultural land they own. Federal tax policy can make these choices easier by easing the tax burden on landowners who want to sell their land to a young or beginning farmer.
While Congress remains focused on repealing the estate tax or increasing its exemption, we believe a more impactful tax code change would be to reduce the 20 percent capital gains tax on the sale of farmland.
Capital gains taxes discourage landowners from selling agricultural land during their lifetimes, especially land that has appreciated over several decades. Those who can find a way to hold on to their land until death do so, since it allows both them and their heirs (through stepped-up basis) to avoid capital gains. For those with little choice but to sell—landowners with no heirs, or whose land represents their primary retirement asset—the 20 percent federal capital gains tax takes a significant bite out of their sales proceeds, leaving less for family and retirement needs.
This disincentive on lifetime sales of agricultural land not only penalizes landowners who need or choose to sell their land, it also limits opportunities for young and beginning farmers and ranchers across America. In surveys conducted by both American Farm Bureau Federation and National Young Farmers Coalition, young and beginning farmers have ranked access to farmland as their top challenge. The reason: lack of available and affordable land on the market. Of the 91.5 million acres of agricultural land that USDA expects will transfer ownership between 2014 and 2019, just 34 million acres are likely to be sold, and only 21 million acres will be sold to non-relatives.
To keep farmland in the hands of farmers through this seismic transfer of 370 millions of acres of agricultural land, American Farmland Trust, Land For Good, and the National Young Farmers Coalition propose a simple tax code change: Exclude sales of agricultural land to young, beginning, veteran or minority farmers from up to $1 million of capital gain – a potential savings of up to $200,000 at current federal tax rates. This is a win-win for all agricultural landowners. Older farmers can have more say in choosing a successor for their farm or ranch, while keeping more of their sales proceeds for retirement. Young and beginning farmers benefit, as more land comes on the market rather than remaining tied up in trusts and estates.
Congress has an opportunity with this tax overhaul to ease the tax burden on agricultural landowners who want to pass their land on to a new generation, and to help young farmers and ranchers access land and start farm businesses.
Every farmer wants to see their farms continue, passed on to and stewarded by the next generation. Let's help them do that during their lifetimes.
John Larson, Senior Vice President of Policy & Programs, American Farmland Trust
Cris Coffin, Policy Director, Land For Good
Andrew Bahrenburg, National Policy Director, National Young Farmers Coalition