Stepped-Up Basis and Illinois Farmland — The Tax Advantage Most Heirs Miss
The Tax Advantage That Most Farmland Heirs Do Not Know About Until It Is Too Late
A family in central Illinois inherited 200 acres of Sangamon County farmland in 2024. Their parents bought it in 1978 for $1,100 per acre — $220,000 total. By the time of death, that ground was worth $7,500 per acre — $1.5 million. Under the original cost basis of $220,000, selling that ground would have generated a taxable capital gain of $1.28 million, with federal long-term capital gains tax owed on the full amount.
Under the stepped-up basis rules, none of that gain was taxable. Because the parents held the ground until death, the heirs' cost basis reset to the fair market value at the date of death — $1.5 million. They could sell the day after the estate closed and owe zero federal capital gains tax on more than a million dollars in appreciation.
That is the step-up, and it is one of the most powerful wealth transfer mechanisms available to Illinois farmland families. Most heirs do not know it exists with enough clarity to act on it until the opportunity has already been shaped by decisions made years earlier — often without understanding what was at stake.
How the Stepped-Up Basis Actually Works
Under current federal tax law, when a person dies holding appreciated assets — real estate, farmland, stock — the heir's cost basis in those assets is stepped up to the fair market value at the date of death. This eliminates the unrealized capital gains that accumulated during the decedent's lifetime.
For Illinois farmland families, this provision has extraordinary practical value. Farmland purchased in the 1960s, 1970s, or 1980s at prices that seem almost fictional today has appreciated by factors of 10 to 20 times in many central Illinois counties. Without the step-up, that entire appreciation would be subject to capital gains tax at the time of sale. With the step-up, a child or grandchild who inherits the ground and sells it at or near the stepped-up value pays no federal capital gains tax on any of that generational appreciation.
The step-up applies to property transferred at death — not to lifetime gifts. A parent who gives farmland to an adult child during their lifetime passes the original cost basis along with the gift. The child who eventually sells that gifted ground will owe capital gains tax on the full appreciation from the original purchase price. A child who inherits the same ground pays tax only on appreciation above the date-of-death value. For high-appreciation farmland, the gap between these two scenarios can easily exceed $300,000 in tax liability on a single parcel.
What You Need to Document to Protect the Step-Up
The step-up is only as useful as the documentation that supports it. For the estate to establish the stepped-up basis, you need a defensible fair market value for the farmland at the date of death. That value typically comes from a qualified appraisal by a licensed real property appraiser conducted close to the date of death, or a comparative market analysis supported by recent arm's-length sales of comparable ground in the same county and PI range.
The IRS has the authority to challenge estate valuations, and undervalued farmland estates have been a recurring audit focus. If the estate reports a date-of-death value for 160 acres of McLean County ground that is materially below what comparable ground has been selling for in recent auction activity, that discrepancy creates audit risk. The defensible approach is an accurate appraisal — not a low estimate that understates the estate value, but a credible reflection of what that ground is worth on the open market.
The Menard County Board of Review assessment value and the property tax equalized assessed value are not substitutes for a qualified appraisal for estate purposes. Assessment values in Illinois lag behind current market conditions in years of rapid appreciation. Rely on a formal appraisal from a qualified appraiser familiar with central Illinois farmland markets.
How the Step-Up Shapes Planning Decisions While the Owner Is Still Alive
Understanding the stepped-up basis changes the calculus on lifetime giving of farmland. For a parent considering whether to give ground to the next generation now or hold it until death, the tax analysis strongly favors holding until death in most cases — because the gift eliminates the step-up and transfers the embedded capital gain along with the property.
There are exceptions. If the estate will be large enough to trigger federal estate tax, the calculus shifts. There are also situations where a parent's health or the family's need for simplicity makes a lifetime transfer the right call despite the loss of the step-up. These decisions require coordination between a real estate attorney, a CPA, and an estate planning attorney who understands both the tax code and the family dynamics. The general principle holds: for central Illinois farmland families with ground that has appreciated significantly, the step-up is worth preserving if preservation is possible.
When the Step-Up Creates an Opportunity to Sell
Heirs who inherit farmland at a stepped-up basis are in an unusual position: they can sell immediately without triggering the capital gains tax that the original owner could never have avoided. This creates a genuine window to evaluate whether holding or selling makes more sense for the family's situation.
A 70-year-old landowner who bought McLean County ground in 1975 might not be able to sell and reinvest elsewhere without a major tax hit. An heir who inherits that same ground in 2026 at the current fair market value can sell, pay the closing costs, and reinvest the proceeds — with no capital gains liability, because the basis matches the sale price. That flexibility changes the conversation about what to do with inherited farmland.
It does not mean the answer is always to sell. Central Illinois farmland has historically been an excellent long-term asset. But understanding that the step-up creates a tax-neutral sale window — one that closes as soon as the property appreciates above the stepped-up value — is important context for any heir navigating a farmland inheritance decision. The conversation with an estate planning attorney and a CPA should happen before that window closes, not after.
Jared Williams is the Managing Broker and owner of Archer Realty & Auction LLC. He serves on the Menard County Board of Review and specializes in agricultural land sales, auction services, and estate real estate transitions across central Illinois. Start the conversation at archerrealty.net.
