If We Gift Land Now, Can the Kids Still Get a Step-Up Later?

Yes, sometimes—but not because the gift itself earns a step-up. A lifetime gift generally gives the recipient the donor’s tax basis, not the land’s current market value. The children may receive a basis adjustment later if they still own the land when they die and the property is included in their taxable estate for federal income-tax basis purposes. That result depends on how the gift and later estate are structured, and it can change if the land is sold, transferred again, or subject to special rules.

Before choosing income tax vs estate tax a strategy, I ask two questions: Who is likely to sell this asset, and when? And what does the basis look like today? For farm families, those questions often matter more than the fear of federal estate tax. Estate tax exposure is rare for most farm estates; income tax from a low-basis asset can be a more immediate succession threat.

Gifted land, step-up later: the basic rule

When a parent gives land to a child during life, the child generally receives the parent’s adjusted basis under the carryover basis rules. The child does not usually get a new basis equal to the land’s fair market value on the gift date.

For example, suppose a parent’s adjusted basis in farmland is $200,000 and its fair market value is $1 million. If the parent gifts it outright, the child generally takes a $200,000 basis, subject to details such as gift tax adjustments and special basis rules. If the child later sells the land for $1 million, the gain may be substantial. The exact tax result depends on selling costs, improvements, depreciation, ownership structure, and other facts.

If the child keeps the land and dies owning it, the land may be included in the child’s gross estate. If it is included, the child’s heirs may generally receive a basis equal to fair market value at the child’s death—or an alternate valuation amount if applicable. This is the potential later step-up. The important point is that estate inclusion and basis are connected, but estate inclusion does not necessarily mean an estate tax bill is due.

Event General basis result Planning question Parent gifts land to child during life Child generally receives carryover basis Could the child sell before inheriting it? Child dies owning land that is included in the child’s estate Heirs may generally receive a date-of-death basis adjustment Will the land be included, and will the child still own it? Child sells land during life Gain is generally measured using the child’s basis What are the likely sale date and tax cost?

Why estate tax is not the only—and often not the main—concern

“Estate tax” gets used as a catchall for taxes connected to a farm transfer. That shorthand can hide the actual issue. Federal estate tax applies only when an estate exceeds the applicable exclusion, and state estate or inheritance taxes may have different thresholds and rules. Many farm estates do not owe federal estate tax. Rules and thresholds can change, so families should check current law rather than rely on an old number from a neighbor or a past tax return.

Income tax can matter even when estate tax does not. If a child receives a lifetime gift of appreciated land and sells it, the child generally starts with the donor’s basis. That can produce a large taxable gain. If the same land passes at death and qualifies for a basis adjustment, the heirs’ income-tax result may be very different if they sell soon after inheriting it.

There is no universal answer that says “always gift” or “never gift.” A lifetime transfer may help with a family’s business, management, or long-term ownership goals. But making a gift just to reduce a possible estate tax bill—without modeling the basis consequence—can trade a speculative tax problem for a real income-tax cost.

Carryover basis rules: what the family needs to find

The parent’s basis is not necessarily the original purchase price. It may include the cost of qualifying improvements and certain acquisition expenses, and it may be adjusted by events over the farm succession plan template years. The family should gather deeds, closing statements, improvement records, prior returns, and any records of land division or exchanges. Reconstructing basis after decades can be difficult, but a reasonable file is far better than guessing.

Also check whether the land has been depreciated. Land itself is not depreciable, but buildings, drainage, tile, fencing, and other farm assets may have separate tax treatment. A farm might also own equipment in a separate entity from the land. The land’s basis and the equipment’s basis should not be lumped together.

A gift is not the same as an inheritance

For a lifetime gift, the recipient generally steps into the donor’s basis position. For qualifying property transferred at death, the recipient generally looks to the basis rules for inherited property. Different rules, different starting points. A gift can also have special rules when the property’s fair market value is below the donor’s basis, or when gift tax is paid. Those cases can require separate calculations for gain and loss.

There are exceptions and anti-abuse provisions. For example, special rules can limit a basis adjustment when a person gives appreciated property to someone who dies within one year and the property comes back to the original donor or the donor’s spouse. Transfers involving retained control or use, trusts, marital property, and business entities can raise additional questions about whether property is included in an estate and how basis is determined. Do not assume the deed alone answers those questions.

Depreciation can make the farm’s income-tax problem bigger

Land may be the biggest asset by value, but depreciated equipment and buildings can create a separate tax bill. Depreciation reduces basis. When depreciated property is sold for more than its adjusted basis, some or all of the gain may be treated as depreciation recapture.

For many farm machines and other personal property, IRC Section 1245 depreciation recapture is ordinary income, generally up to the depreciation previously allowed or allowable, subject to the statutory rules. “Paid off” does not mean “tax-free to sell.” A combine can have no loan balance and still have a very low adjusted basis because the family deducted depreciation over time.

This is where old Schedule F records and depreciation schedules earn their keep. Schedule F reports farm income and expenses, while depreciation details are generally supported by Form 4562 and the farm’s depreciation records. Review those schedules before gifting equipment, selling it, or putting it into a different entity. A spreadsheet that shows only purchase price and loan payoff will not reveal the recapture exposure.

What a transfer at death may—and may not—solve

If qualifying equipment is inherited with a basis adjustment, prior depreciation may not automatically produce the same recapture result it would have produced in a lifetime sale. But the heirs’ later depreciation, use, and sale can create their own tax consequences. The rules depend on the transfer, the property, and the transaction. A gift of equipment during life is not equivalent to an inheritance, and the carryover-basis approach can preserve a low basis that matters when the recipient sells.

That is why I keep asking: who is likely to sell this asset and when? If the next generation plans to sell an old tractor shortly after transfer, model the sale before signing the gift documents. If the equipment will stay in service for years, the comparison may look different.

Make the decision with a side-by-side plan

Ask your tax and legal advisers to compare the likely outcomes, not just the transfer documents. A useful review should include:

Current ownership: Who owns the land, buildings, and equipment, individually or through entities?
Adjusted basis: What basis can the family document for each major asset?
Depreciation: What has been claimed, and what potential recapture could arise on a sale?
Likely sale or transfer: Who may sell each asset, and on what timeline?
Estate exposure: Could the transfer affect federal or state estate-tax exposure under current law?
Family goals: Who will farm, manage, or receive income from the property?
Control and cash flow: Can the older generation afford to give up ownership or use?

Then compare at least two paths: a lifetime gift and a transfer at death. Include estimated income tax, potential estate tax, legal and administration costs, and the family’s control needs. A strategy that saves tax but leaves the parents short of retirement income or creates an unfair split may not be a good succession plan.

Use good information, not a generic “trust fixes everything” pitch

A trust can be useful, but it does not automatically erase capital gain, depreciation recapture, or basis problems. The trust’s terms, tax classification, ownership, and administration matter. Ask what basis the heirs would receive, whether the land would be included in an estate, and who can sell it. Get the answer in writing for the actual assets and proposed documents.

Families can also use plain-language learning resources to prepare for a meeting. AGDAILY covers agricultural topics that may help families follow industry discussions. The USDA Economic Research Service publishes data and analysis on U.S. agriculture and farm-sector trends; that information can add context, though it does not replace tax advice about a specific farm. For a busy operator, an Instaread summary with its audio player (Instaread) can make it easier to listen to general reading while driving between fields. Treat all of these as background, not as a substitute for reviewing your records and current tax law.

Bottom line

Yes, children who receive land as a lifetime gift may later receive a basis adjustment if they still own it at death and the land is included in their estate under the applicable rules. But the gift itself generally carries over the donor’s basis. If the children sell first, they may face gain based on that low basis.

For many farm families, the bigger threat is not federal estate tax. It is an income-tax surprise from appreciated land or depreciated property—especially equipment with potential Section 1245 ordinary-income recapture. Before gifting anything, identify the basis, review the depreciation schedule, and decide who is likely to sell the asset and when. That answer should lead the plan, not the other way around.

This article provides general information, not legal or tax advice. State law, ownership structure, and individual facts can change the result. Have a qualified tax professional and estate-planning attorney review the specific property and current law before making a transfer.