One of my favorite strategies to transfer a farm is using a well-structured family installment sale. However, this goes against what you see in the general marketplace.
While this can be a powerful tool in transition planning, many families plan around the idea of holding the land until death so that heirs inherit it with a stepped-up basis. Understanding the pros and cons of selling now versus waiting for inheritance is crucial for thoughtful succession planning.
The biggest reasons families hesitate to sell farmland during the owners’ lifetime is fear over taxes or fear of lost income. When farmland has been in the family for decades, its original basis — the price paid when first acquired — is often far below its current market value. If the current owner sells, capital gain taxes can wipe out a large portion of the proceeds. I recently touched on stepped-up basis, and why it’s not always the No. 1 priority for farm families.
Case for selling to heir now
But what if you sell the farm to your heir now, especially using an installment sale? Under the installment method, the seller spreads the gain over years as payments come in, instead of recognizing all of the capital gain in one tax year. That can significantly soften the annual tax hit.
Here are some advantages of selling to your heir now:
Immediately transitions ownership and control. Instead of waiting for an uncertain future date, a sale can help the next generation build equity and control in the business on their terms.
Spreads tax liability over time. Installment sales allow the seller to recognize gain as payments come in, possibly reducing the tax rate in individual years and making the tax bill more manageable. In some cases, this is more tax efficient than continuing to recognize income taxes on rental income.
Offers financial planning for retiring generation. Proceeds from sales can provide income for retirement, pay down debt or offer liquidity for other needs. This can be especially important if the retiring generation does not have other sufficient resources for retirement.
Helps farming heirs build credit. A structured sale — possibly paired with beginning farmer loans — can help the next generation qualify for additional financing.
Using this split strategy can also tailor the purchase price to family goals. For example, discounting the price and using lifetime gift exemptions may reduce future estate tax exposure while preserving a fair transition. Most importantly, it transfers some equity now to support the financial viability of the business.
Drawbacks of selling now
Selling to your heir isn’t without trade-offs:
Loss of step-up in basis on appreciated value. If the heir buys the land during your lifetime, the purchase price is their basis. On a future sale, they could owe capital gains on the difference between the purchase price and sale price. In contrast, inherited land typically receives a stepped-up basis, reducing or eliminating that gain.
Family fairness concerns. Not all heirs may want to buy in or participate in the farming operation. Selling to one heir now could create perceived inequality unless thoughtfully managed.
Cash flow considerations. While installment sales spread gain recognition, they also tie up equity in payments over time. Families need to ensure that future payments are reliable and align with retirement planning.
Pick choice for your family
There’s no one-size-fits-all answer. Selling to your heir now may provide financial flexibility, equity building and a smoother transition for the next generation — even if it means losing a stepped-up basis on some gain. Waiting for inheritance preserves that tax benefit but can delay ownership clarity and limits retirement planning flexibility.
Ultimately, the best choice depends on family goals, financial needs, willingness to engage in thoughtful planning, and trusted advice from tax and legal professionals.
Tax rules are just one part of the succession puzzle. They should inform, not dictate, decisions about the future of your farm.
Downey has been consulting with farmers, landowners and their advisers for nearly 25 years. He is a farm business coach and manager of succession planning at UnCommon Farms. Reach Mike at mdowney@uncommonfarms.com.