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I guess stepped up basis is considered a loophole
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Distance Runner
Posted 6/30/2020 14:51 (#8345615 - in reply to #8344635)
Subject: RE: I guess stepped up basis is considered a loophole


SE SoDak
Thanks for starting an interesting, and mostly civil discussion. I suspect many/most of us have benefited from stepped-up basis. I certainly have. After doing a bit of research, I see that the basis step up has mostly been in place as part of tax law since the late 1970's. This caused me to think a bit more...

At the micro, individual level, stepped up basis initially looks like a clear good. Upon death of parents, land is inherited essentially tax-free. Wonderful. But there are some hidden costs both to individuals and to small farming communities:

In the old days (pre 1980s), before step up basis, farms were generally passed from father to son when Dad got into his early 60's. The land was sold, often at lower than market rates, parents bought a house in town, Dad still helped out, and the son(s) ran the farming operation by the time they were 35 or so. Land prices were pretty stable as a result. If no kids wanted to farm there were usually nephews, or neighbors, or somebody local eager to make the purchase.

Fast forward to today. The older generation frequently holds onto the land until death, because they almost have to due to tax laws combined with the large increase in land values. The basis step up creates this perverse incentive. Any kids that want to farm often have to wait for their parent's death to finally own the farm (True story, I have one acquaintance that finally inherited the farm they lived on when they turned 65! They had been farming it alone for rent nearly 40 years).

If the owners don't have kids that want to farm, they become absentee landlords. Often, the next generation keeps the land even longer, figuring that rent is nice steady income, perpetuating the absentee landlord problem for another generation. Right now, looking at our local plat map, most quarters are owned by individuals that haven't farmed for twenty years. Many never have farmed, or even grew up on a farm....just next-generation winners of the sperm lottery.

The impact has been dramatic. Absentee landowners, God bless them, don't spend money locally in our small towns. Don't support local schools. Don't participate in civic organizations. They extract value from the community land that historically has supported the local economy, but instead that money now flies off to Arizona or Florida or wherever and circulates there. Yes, they pay property taxes, but that is it. Many things have contributed to the declines of our small towns, but this is surely one of them.

So, yes, I agree with the consensus that loss of step up basis is certain to be bad for many individuals. Farmers will need to alter succession plans, update wills and trusts, and possibly purchase life insurance to deal with the taxes. I'll have to as well. I do wonder though if long term perhaps we will see fewer absentee landowners. I'm not particularly optimistic about the future of rural america, but I do wonder if this will help fix the absentee landlord problem and make land values return to a realistic level.
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