Producers own various farm and non-farm assets. Some are terrific holdings for heirs and shouldn’t be sold. Others are bad for heirs, meaning it usually makes sense to get rid of them.
The ranking on this page identifies how well the tax code steps up or steps down for each of these assets. At death, all assets are either stepped up to fair market value, which is good, or stepped down to fair market value, which is bad.
This ranking assumes your combined estate is under the lifetime exemption amount of about $10.7 million for married couples and that your state does not have an estate tax.
1. Harvested Grain. Cash-method farmers may deduct all growing costs, resulting in harvested grain having a zero-cost basis. Grain is also subject to self-employment tax for Schedule F farmers and partners. If your estate owns grain, heirs may step up the grain to market value at your date of death. Heirs owe no income tax unless they sell grain above the date-of-death value.
2. Fully-Depreciated Equipment. If sold during your lifetime, fully depreciated equipment is subject to ordinary income tax rates. Self-employment taxes and capital gains rates do not apply. If the equipment is inherited, the equipment is stepped up to fair market value and depreciated over seven years.
3. Raised Livestock. If steers or heifers will be sold at auction, heirs get a full step-up and can offset the sale price with that value. Raised breeding stock older than 2 years is less advantageous to heirs because it may be sold in the hands of the original owner at capital gains rates.
4. Highly-Appreciated Land Or Stock. Keep sitting on 10-bagger farmland. If you sell it now, you owe lower capital gains taxes. Your heirs will owe no taxes if they sell it for the date-of-death value. An S corporation that owns farmland may sell and liquidate the corporation tax-free.
5. Roth IRAs. After paying income tax on your IRA or 401(k), you may turn it into a Roth account. Money compounds tax-free inside the account and withdrawals are tax-free.
6. Somewhat Appreciated Assets. Suppose land you purchased two years ago for $250,000 is now worth $350,000. By utilizing an installment sale and spreading capital gain over a few years, you may sometimes (but not always) be able to recognize the gain and pay no capital gains taxes.
7. Taxable IRAs Or Retirement Plans. These accounts, funded with previously untaxed contributions, require minimum distributions if you are over age 70½. The question is whether to pull out additional sums to pay bills. If you cash in an IRA, you will owe income taxes. Yet, if your heirs inherit an IRA, they will also owe income taxes. Compare respective tax brackets before making the decision.
8. Depreciated Assets. If you bought stock for $50,000 and it is now worth $15,000, sell it and claim the $35,000 capital loss. You can always wait 31 days and buy it back. The capital loss will offset any capital gains. On any excess, you can deduct $3,000 per year against other taxable income. Die with this depreciated asset and your heirs will get a step-down basis of $15,000. They may not deduct losses between $50,000 and $15,000.