Farmland: Gift During Life or Inherit?

Updated August 3, 2026. Quick answer: the general rule — that inheriting resets basis to date-of-death value while a lifetime gift carries the giver’s old basis forward — applies to farmland exactly as it applies to anything else, and we work that arithmetic through on a separate page. What is different about farmland is that giving it away during life can also cost the estate two elections that only exist at death.

The basis arithmetic, including when a step-up is a step-down, worked through — that page owns the numbers. This page covers only what farmland adds.

What farmland adds, part one: 2032A is an estate election

Special-use valuation is elected by an executor on an estate tax return. Ground given away in 1998 is not in the estate in 2026, so it cannot be valued under section 2032A — and, worse, it is not counted toward the 50 percent and 25 percent tests either. A family that gave away a third of the ground over the years can find the remaining estate no longer qualifies at all.

What farmland adds, part two: the 35 percent test cuts the same way

If the value of an interest in a closely held business which is included in determining the gross estate of a decedent who was (at the date of his death) a citizen or resident of the United States exceeds 35 percent of the adjusted gross estate, the executor may elect to pay part or all of the tax imposed by section 2001 in 2 or more (but not exceeding 10) equal installments.

— 26 U.S.C. §6166(a)(1)

The instalment election is measured as a share of the adjusted gross estate. Gifting ground away shrinks the numerator. It is entirely possible to gift enough farmland to fall below 35 percent and lose the right to pay the remaining tax over fourteen years — which is to say, to create the liquidity crisis you were trying to prevent.

What farmland adds, part three: depreciated equipment does not behave like land

Gifting a combine is not gifting a field. Farm machinery that has been depreciated carries a low adjusted basis and a recapture exposure that a gift does not clear.

Why the machinery cheque is taxed worse than the land.

The case for gifting anyway

None of the above says do not gift. Two situations still favour it: an estate comfortably below the federal filing threshold, where the elections are irrelevant and no estate tax is at stake in the first place; and a deliberate transfer of the operating business to the child who farms, where getting them managing and building equity in their forties is worth more than a basis step-up their heirs would use decades later.

What argues against gifting is doing it piecemeal, without checking the percentage tests, because it feels generous. That is the version that quietly disqualifies the estate.

Honest gaps

Whether a particular estate will owe federal estate tax at all depends on the applicable exclusion amount in the year of death and on lifetime gifts already made (the current exemption). We have not stated that figure here because it is the one people most often carry forward from an old article; check it for the current year before assuming any of this is live for you.

Related: passing down the farm.

General information drawn from the Internal Revenue Code, Treasury regulations, IRS publications and the relevant state statutes, not legal or tax advice. Dollar figures are adjusted regularly and the state-law half differs from state to state, so check the current year and your own state before you act on a number.