Can you really give the farm away without paying gift tax?
How much can you discount your farm sale and avoid gift tax? A Farmer’s Guide
Planning for the future of your farm is one of the most important steps you can take to protect your legacy. A common question farmers ask is, “Can I sell my farm for $1.00?” The short answer: yes, you can, but there’s more to it. This article will explore how gifting works, the tax implications, and some strategies to ensure a smooth farm succession.
Gifting vs. Selling Your Farm
Farmers often ask us if there is a minimum amount they have to sell their farm for or what happens if they discount it too far. This question comes up so frequently because most farmers realize the market value of their farm is too high for their farming heir to pay and have any chance of being successful. So then we need to looking at gifting the farm or selling it at a discounted price to the next generation. In many cases, you can gift your farm for nothing, and in some states, like Minnesota, there’s no gift tax to worry about. However, it’s not as simple as handing over the deed.
Key Points About Gifting in Minnesota
No Gift Tax: Minnesota does not have a gift tax. The state once tried implementing one but rolled it back due to poor reception.
Estate Tax Lookback Period: However, gifts made within three years of death are added back to the Minnesota taxable estate value for tax purposes. This can impact the total taxable estate if the farmer passes away within that timeframe. For example, if the deceased farmer dies with a $3 million estate but had given $3 million of farmland away a year before death, the actual taxable value of the estate is going to be $6 million.
Estate Tax Exemption: Minnesota allows a $3 million estate tax exemption per person, with an additional $2 million farmland deduction available in certain cases. See our post, Updated Estate and Gift Tax Information for 2025.
Federal Gifting Rules
On the federal side, gifting rules are a little more complex but, at the time, more generous:
Unified Exemption: Each person has a $13.99 million gift and estate exemption in 2025, which can be used during life or at death.
Annual Gift Exclusion: You can gift up to $19,000 per recipient per year without impacting your exemption. Gifts exceeding this amount reduce the federal unified exemption but don’t incur immediate tax liability. Keep in mind that you would need to use up your entire federal unified exemption before owing any tax.
Potential Rollback: The federal exemption is scheduled to roll back at the end of 2025 to around $7 million per person, adjusted for inflation. The sunsetting of the current exemption amounts could have a significant impact on many farm estate plans. See our post New USDA Study Projects Increase in Share of Farm Estates That Owe Federal Estate Tax.
Why Gifting is a Strategic Tool
Gifting can be a powerful tool for farm succession planning, allowing you to transition assets to the next generation while potentially reducing estate taxes. However, there are several factors to consider:
Appraised Value: We would use the appraised fair market value to set the baseline of the value of the property. The gift is equal to the difference between the fair market value and the discounted sale price. For example, if the farm is valued at $1,000,000 and it is sold for $500,000, the farmer has made a $500,000 gift. This will be reported on a gift tax return (which will have no tax owing if there is remaining exemption to apply).
Stepped-Up Basis: Gifting impacts the recipient’s tax basis in the property, which may have implications if the farm is later sold. For gifting, the recipient receives a carry-over basis. On the other hand, the gifted farm would be excluded from the Minnesota taxable estate after three years and the farming heir will have the benefit of ownership earlier. Conversely, if the farm were inherited, the recipient receives a stepped-up basis. The tradeoff is that now the farm may generate estate taxes.
Discount Strategies: Applying discounts for partial interests or lack of marketability can make gifting more tax-efficient. This is especially the case where the farm may be held in more restrictive structures, such as through an LLC or LLP, and is subject to a buy-sell agreement.
Planning Ahead
Farm succession planning isn’t just about taxes; it’s about ensuring the viability of your operation for future generations. Whether you choose to gift, sell, or use a combination of strategies, working with a knowledgeable farm lawyer is crucial.
Conclusion
Farmers can and should consider gifting their farm or selling it to their farming heir at a discount. This is a common and effective strategy for setting the next generation up for success, avoiding estate taxes, and protecting the farm. But it is not as simple as just signing a deed. The implications depend on timing, tax laws, and careful planning. By strategically using exemptions, exclusions, and discounts, you can ensure a smooth transition while minimizing tax burdens.
Next Steps
As stewards of your family’s legacy, your decisions today will echo for generations. At Wagner Oehler, Ltd., we’re here to guide you through life’s most crucial legal decisions, including farm succession planning (check out our video on Farm Succession Planning and subscribe for more content). Together, we can create a plan that honors the sacrifices of the past and secures the future of your farm.