Understanding Section 2032A Special Land Valuation Under New Tax Plans

The House bill allows a reduction of up to $ 11.7 million for the special assessment. So, in this example, the FMV of $ 15 million would drop to $ 8.93 million for the special appraisal.

In this example, the changes made to the House in Section 2032A would save the farm approximately $ 1.95 million in property taxes by increasing the special purpose valuation from $ 13.81 million to $ 8, $ 93 million.

“So a very large estate would gain substantial benefit from it, especially if for some reason that farmland is valued at a higher amount than its rental value,” Hesse said.


With the current exemption from inheritance tax for everyone at $ 11.7 million for an individual ($ 23.4 million for a couple), there just hasn’t been much reason to plug the ‘special land valuation tool, Hesse said.

For large farmers who are subject to inheritance tax, Article 2032A is not an equal compromise to halve the inheritance tax exemption.

There are also other major warnings that can go back to the heirs. On the one hand, section 2032A requires family members to continue to cultivate the land – for 10 years. And they must be direct descendants – sons and daughters, not nephews or nieces.

The IRS also places a lien on farmland for the amount of property tax that was not paid due to this lower land valuation. This could affect an heir’s ability to use the land as collateral.

“No one likes to lend to someone who has an IRS lien on their property,” Hesse said. “This will discourage a lender from lending on this property knowing that the IRS will be number one.”

And it could come back to bite the heirs if the farm economy goes wrong and he or she is faced with the sale of the farm.

“You would have this obligation to the IRS for inheritance tax, but no money because of the losses, and it could be a train wreck,” Hesse said. “There have been a few examples of train wrecks as a result of using this tool to lower your property taxes.”

An heir-farmer who does not hold on to the ground for 10 years could see the IRS seeking to recover all of the tax payable that was saved when the estate was transferred.

“You have to understand your risk in adopting this provision because, if you don’t continue to cultivate or an heir does not continue to cultivate this for 10 years, you will have additional tax payable,” Hesse said.

The 2032A assessment would largely come into play for farmers or other small real estate businesses that haven’t taken advantage of other estate planning tools, Hesse said. For this reason, CliftonLarsonAllen does not have clients who have used Section 2032A, despite the importance the CLA places on agriculture.

“The reason we’re not doing this is because we’ve worked with clients to plan for other ways to lower their estate taxes, so we don’t have to rely on 2032. For me , it is a provision for the person who did nothing. planning, but developed great agricultural wealth and died young before they had a chance to start planning their succession. “


Potential changes in the increased base, inheritance tax and capital gains are still pending.

House leaders did not say when they would put their reconciliation bill to a vote. Any provision of the bill could change by then. The US Senate would then also weigh on its potential tax plans.

Sen. Chuck Grassley, R-Iowa, told reporters on Tuesday he planned to speak in the Senate this week, highlighting an Iowa farmer who would explain how the Democratic tax plan would hurt his family. “The tax and spending proposals will be bad for small businesses, for farmers and for everyone in Iowa,” Grassley said.

“Under Democratic plans, it would take decades for the younger generations to pay for the land,” Grassley said.

Yet at least some Democratic senators continue to push for changes to the strengthened ground rules. Senator Elizabeth Warren, D-Mass., Called it a “handy fruit” while pushing for a “wealth tax”.

“The Strengthened Basic Loophole allows wealthier Americans to inherit fortunes without paying a dime in capital gains tax – a massive subsidy that perpetuates the racial wealth gap and inequality,” Warren said on Twitter Sunday.

Agriculture Secretary Tom Vilsack and Senior Senator John Boozman, R-Ark., A senior member of the Senate Agriculture Committee, also back and forth in dueling articles in the Wall Street Journal on tax plans for family farms (https://www.wsj.com/…).

Chris Clayton can be contacted at Chris.Clayton@dtn.com

Follow him on Twitter @ChrisClaytonDTN

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