Every year, huge tracts of America’s undeveloped landscape fall prey to a section of the federal estate tax—known to many as the “death tax”—which forces the sale and development of land just to pay the tax bill. Undeveloped land that has been in families for generations ends up on the chopping block of development when land is transferred from one generation to the next. Why? Because the Internal Revenue Code (IRC) indiscriminately applies a harsh valuation of land; even when a family plans to conserve undeveloped land for generations to come. At a time in our nation’s history when the preservation of hunting land should be ultimately encouraged, coerced development of such land is all too prevalent.
There are many factors driving the deforestation and development of land throughout America. Exploding population growth creates urban sprawl with millions of acres fields and trees converted to concrete each year. Population growth is a macro issue that is tough to combat, but there is one specific IRC provision that, if changed, would be an enormous step in the right direction: the valuation of a decedent’s land. There have been a few legislative attempts to address this provision, but they have not succeeded. A change to the valuation of a decedent’s land must be adopted soon to protect the vast quantities of hunting land that are being lost each year before it is too late.
Overall, the Congressional Budget Office estimates that estate tax has generated just 1-2 percent of federal revenues in most years during the past half-century. For 2012, the estate tax has a top tax rate of 35 percent with an exemption amount of approximately $5 million. In 2013, the top tax rate jumps to 55 percent and the exemption amount will fall to $1 million. Landowners have long been penalized under the estate tax, but they have suffered even more in recent times, with land values on the rise and the exemption amount in a state of flux.
The disconcerting rule within the estate tax that is the impetus behind large tracts of land being sold for development concerns the valuation of land when the estate tax is calculated after the owner dies. For estate tax purposes, the IRC valuates any property at its “highest and best” use. This requires the valuation of land at which it can bring the highest selling price, regardless of the land’s actual, intended or even likely use. In essence, Uncle Sam wants to make sure that a piece of undeveloped land is valuated at condo or commercially zoned prices simply because it might be sold as such some day. Heirs are then forced to sell the land to pay the estate tax based on the inflated value.
“Some day” is the key phrase in the government’s valuation method. It is as if the Internal Revenue Service (IRS) came onto the property of a decedent to appraise his or her estate and claimed that a small vein of coal in the decedent’s backyard has the potential to become a diamond some day. It takes an extraordinary amount of pressure, heat and millions of years for the transformation to occur, but such valuation logic is precisely what the “highest and best” use rule demands of a decedent’s undeveloped land, albeit physics versus a tax policy. The IRS should not play fortune teller based on a prediction of the “theoretical use” of land, just as it should not valuate a piece of coal based on the remote potential that it might become a diamond.
It is in America’s best interest to create incentives for the preservation of undeveloped land. Sportsmen have long protected this country’s great outdoors and deserve to have government policies that protect hunting land. Many farms, ranches and timber stands across the country have belonged to the same families for generations who have no plans to sell or develop. Penalizing those who would otherwise protect undeveloped land indefinitely is unconscionable. Conservation easements have relatively low exemption limits, and do not solve the problem. Protecting large tracts of land with values that easily exceed the ever-changing exemption threshold should be a top priority in conservation and hunting land preservation efforts.
A complex and stringent exception in the IRC is supposed to protect agricultural land, but a vast amount of undeveloped land ends up covered with asphalt and subdivisions anyway. That provision, section 2032A of the IRC (26 U.S.C. § 2032A), was born from a logical statement by Congress in 1976:
“[W]here the valuation of land reflects speculation to such a degree that the price of the land does not bear a reasonable relationship to its earning capacity, [the House Ways and Means Committee] believes it unreasonable to require that this ‘speculative value’ be included in an estate with respect to land devoted to farming or closely held businesses.”
Section 2032A deviates from this logical premise because it was formulated with a host of rigid criteria that requires thoughtful estate planning and harbors many pitfalls. For example, the value of qualified real property can be decreased by no more than $1,040,000 for deaths occurring in 2012. This might sound high, but not when considering rising land prices and the large tracts of land that are often involved. Section 2032A is simply inadequate and contains too many pitfalls that have ensnared numerous unsuspecting landowners.
Many family farms across the country exemplify the phrase of being “land rich, but cash poor.” Real property is an illiquid asset and often represents the vast majority of a landowner’s estate. The top estate tax rate that fluctuates from 35 to 55 percent often requires the sale of the family farm just to pay the tax bill. The government should be encouraging the conservation of America’s great outdoors, not compelling sales of undeveloped land to developers just to pay the tax bill.
Congress needs to replace the coal-to-diamonds “theoretical use” valuation with simple and concise legislation that calculates valuation of land by “actual use” to preserve undeveloped land. Because such a logical change would inevitably bring consternation to the IRS, a “recapture” tax during a five year period following the estate tax calculation could be imposed on the heir(s) to prevent the “evasion” of tax for those heirs who do actually sell to a developer.
Hunter numbers have been in decline for most of the past decade and a major reason is the lack of available hunting land. Public hunting land is becoming harder to access and insatiable development is targeting private hunting land. Demand for private hunting land leases and purchases is becoming much greater because of the shortage, and prices are following suit. The damaging estate tax valuation rule is transforming countless acres of hunting land into development each year, which makes these problems worse. The preservation of hunting land is vital to conservation in the United States. Please contact your members of Congress and stress to them the immense importance of changing the misguided valuation rule in the estate tax.