Starting in 2026, the federal estate tax exemption is $15 million per person, and the law no longer schedules it to drop. Unless a family's estate is larger than that, the tax that decides what inherited farmland is worth is the capital gains tax when the land is sold, and that tax depends on how the land changed hands.
Iowa ended its inheritance tax for deaths on or after January 1, 2025, and Arizona has no estate or inheritance tax. If you live in Scottsdale and your parents still own the ground you grew up on, the federal income tax rules are the ones to plan around.
What changed
From 2018 through 2025, estate plans had to account for a deadline. The higher estate tax exemption was set to expire after 2025 and fall to roughly half. Some parents gave land to their children early to get it out of their estate before that happened.
The One Big Beautiful Bill Act, signed July 4, 2025, made the higher exemption permanent and set it at $15 million per person for 2026, indexed for inflation. A married couple can pass $30 million without federal estate tax. Above that, the rate is still 40%.
With the estate tax off the table for any estate under $15 million per person, the most valuable tax feature of inherited land is the one that applies to every estate regardless of size.
How the step-up works
When you inherit land, your cost basis is generally the land's fair market value on the date of death. The IRS calls this a step-up in basis. Every dollar the land gained in value during your parents' lifetime is never taxed.
When you receive land as a gift while your parents are alive, you take their basis instead. If they bought the ground in 1985, you inherit their 1985 cost along with the land. When you sell, you pay tax on the entire gain since then.
On farmland held in a family for decades, that difference can be the largest number in the plan.
A worked example with 2026 numbers
Take a married couple in Scottsdale with $150,000 of other income. One spouse's parents bought 160 acres in 1985 for $160,000. The land is worth about $1.92 million today.
If the parents give them the land and the couple sells it, the gain is $1.76 million. On their 2026 return, about $495,900 of that gain is taxed at 15%, the rest at 20%, and most of it also owes the 3.8% net investment income tax. Federal tax on the sale comes to about $390,000. Arizona adds up to 2.5% more.
If they inherit the same land and sell it for what it was worth at the date of death, their basis is $1.92 million and the gain is close to zero. So is the tax.
With the same land, buyer and price, inheriting instead of receiving a gift is worth about $390,000 in federal tax to this couple.
The Arizona wrinkle
How much of the land steps up at the first parent's death depends on where the parents live and how the land is owned.
In a common law state like Iowa, land owned jointly by a married couple generally gets a step-up on only the half that belonged to the parent who died. The surviving parent's half keeps its old basis until the second death.
Arizona is a community property state. For community property, both halves generally step up at the first death. Parents who retired to Arizona may be in a different position than parents who stayed on the farm, and the answer depends on how the land is titled. That question belongs to your estate attorney. The tax consequences are what I coordinate alongside them.
Get the date-of-death appraisal
The step-up only helps if you can prove the number. An estate below $15 million usually does not file a federal estate tax return, so no one is required to value the land, and heirs often skip it.
Years later, when the land sells, the heirs need to show the IRS what it was worth on the date of death. A qualified appraisal done at the time is the cleanest evidence you will have. Reconstructing a value for one specific date years afterward is harder and easier to challenge.
If a parent has died and the land has not been appraised, have it appraised now, valued as of the date of death.
Two elections that look helpful and may not be
Special use valuation. Under Section 2032A, an estate can value farmland at its farming value instead of its market value, reducing the estate by up to $1.46 million in 2026. That lowers estate tax. It also lowers the heirs' basis to the same reduced value. For an estate under the exemption there is no estate tax to save, so the election only costs the heirs basis.
Spreading the tax on a sale to a farmer. Starting in 2026, someone who sells qualified farmland to a qualified farmer can elect to pay the federal tax on the gain in four equal annual installments. The land has to have been farmed or rented for farming for substantially all of the prior 10 years, and the buyer has to accept a covenant keeping it in farming for 10 years after the sale. The election spreads the tax over four years without reducing it, and on land that has just been stepped up there may be little tax to spread.
When the land stays in the family
Many families do not sell. One child farms, the others own a share and collect cash rent, or the land is held for the next generation.
The step-up still matters, because a sale eventually happens and the basis travels with the land. Rent counts as ordinary income for each owner every year. And when one heir wants to buy out the others, the sale price, the basis, and who pays tax on what all get decided at once.
How the land is held among heirs, whether in common, through an entity, or under a lease to the farming heir, is a legal decision for your estate attorney. The tax side of each option, for each heir, is the part worth modeling before anyone signs.
What it costs to get this wrong
The expensive mistake is a lifetime gift of appreciated land made to solve an estate tax problem the family no longer has. In the example above, that costs about $390,000 in federal tax, and nothing reverses it once the deed is recorded.
The second mistake is losing the step-up you already have by never documenting it. Without a date-of-death value, heirs who sell can end up arguing their basis with the IRS years later.
What to do now
If your parents own farmland, find out whether any of it has already been given to you or your siblings, and when. If a gift is being discussed, put the gift and an inheritance side by side with the tax on a future sale before anything is signed. If a parent has died, get the land appraised as of the date of death and keep the report with your tax records.
I am an Enrolled Agent, admitted to practice before the Internal Revenue Service, and I do tax planning for inheritances, working alongside your estate attorney.
If you want the numbers on your family's land run before a gift, a sale, or a buyout, that is a conversation worth having.
Aaron Randak, CFP®, EA · Golden Acre Wealth Management · Scottsdale, Arizona
Golden Acre LLC dba Golden Acre Wealth Management is an investment adviser registered with the Arizona Corporation Commission, CRD #337930. This article is educational and is not individualized tax, investment, or legal advice. Golden Acre does not draft wills, trusts, deeds or other legal documents. Tax rules change and their application depends on your specific circumstances, including how property is titled and the state where the owners live.