During a recent speaking event, I made a comment about the tax law step-up in basis that clearly struck a nerve. More than one participant followed up afterward to talk through what it meant for their own family.
My comment was this:
“Be careful — the same tax laws that discourage the current generation from selling may do the exact opposite for the next generation.”
Let’s unpack the point I was making.
Why not sell?
For many farm families, capital gains tax is the ultimate roadblock. Land purchased decades ago — sometimes for a few hundred dollars per acre — now carries a massive built-in gain. Selling during the parents’ or grandparents’ lifetime can trigger a tax bill that feels unacceptable.
As a result, families often organize their entire strategy around one objective: preserve the step-up in basis. By doing this the next generation inherits land at its current fair market value, wiping out the embedded capital gains.
From a tax perspective, this makes sense. From a family and business perspective, it’s more complicated.
What’s the tax math?
When land is inherited with a stepped-up basis, the tax math changes dramatically. That same land that felt “unsellable” to mom and dad suddenly becomes much easier to part with. If the next generation sells shortly after inheritance, capital gains tax may be minimal — or even nonexistent — depending on timing and market conditions.
In other words, the tax law that encouraged the previous generation to hold on tightly may unintentionally make selling more attractive for the next generation.
This is where I encourage families to pause.
If the goal is to keep land in the family long-term, tax efficiency alone won’t accomplish that. In some cases, it may actually work against it.
Align the priority with the goal
Preserving step-up in basis is often treated as the gold standard in the estate planning world. And to be clear - it’s an important consideration. But problems can arise in a farm’s succession plan when it becomes the only priority.
I’ve seen families delay necessary transitions, avoid tough conversations, and lock themselves into rigid ownership structures solely to protect step-up in basis. Meanwhile, issues around management readiness, fairness among heirs, governance, and long-term vision go unaddressed.
The result? A beautifully tax-efficient plan that falls apart once the next generation is in control.
Don’t limit yourself
Prioritizing step-up in basis above all else at times can actually limit better outcomes. For example:
- When one child wants to farm and another doesn’t but tax-driven decisions force equal ownership
- When land needs to be restructured to support the on-farm successor, but change is delayed due to tax fears
- When parents retain control for too long, reducing the next generation’s readiness and confidence
In these cases, paying some tax — or planning differently — may lead to stronger business and healthier family relationships in the long run.
Ask these questions
You could ask: “How do we preserve step-up in basis at all costs?”
But a more productive question might be: “What decisions best support the future we want for this farm — and what role do taxes play in that?”
Consider these three things:
- The financial feasibility of the farm when it is asked to carry on the business with no land equity the prior generation held.
- That capital gain taxes are preferential over ordinary income. It may be more tax efficient to transfer land, corporation stock and partnership units via capital gain treatment.
- That farm assets can also receive a “step-down” if market values move lower.
Taxes matter. But they are just one variable in a much larger equation.
Being intentional means understanding not just how the tax law works today — but how it shapes incentives tomorrow.
Sometimes, that means recognizing that preserving step-up in basis, while valuable, is not always the most important objective for a farm family planning its future.
Downey has been consulting with farmers, landowners and their advisors for nearly 25 years. He is a farm business coach and manager of succession planning at UnCommon Farms. Reach Mike at mdowney@uncommonfarms.com.