Exclusion of certain amounts of realized capital gain

(a) In general Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 is amended by inserting before section 140 the following new section: 139M. Exclusion of gain from transfers of appreciated assets at death (a) In general Gross income shall not include— (1) so much of the net capital gain for the taxable year from transfers at death to which 1261(a) applies as does not exceed $1,000,000, and (2) in the case of property that is a qualifying family farm or business that meets the certification requirement of subsection (d), 50 percent of so much of any gain from a transfer described in paragraph (1) as exceeds $1,000,000. (b) Inflation adjustment (1) In general In the case of any taxable year beginning after 2027, the $1,000,000 amounts in subsection (a) shall be increased by an amount equal to— (A) such dollar amount, multiplied by (B) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting in subparagraph (A)(ii) thereof calendar year 2026 for calendar year 2016. (2) Rounding If the dollar amount in subsection (a), after being increased under paragraph (1), is not a multiple of $10,000, such amount shall be rounded to the next lowest multiple of $10,000. (c) Definitions For purposes of this section— (1) Qualifying family farm or business The term qualifying family farm or business means real property located in the United States if during periods aggregating 3 years or more of the 5-year period ending on the date of the bequest of such real property, such real property was used as a farm for farming purposes or a family business. (2) Other definitions The terms farm and farming purposes, and material participation have the respective meanings given such terms by paragraphs (4) and (5) of section 2032A(e), respectively. (d) Use certification as farm for farming purposes or family business The certification requirement of this subsection is a certification that the use of the qualifying family farm or business referred to in subsection (a) will be as a farm for farming purposes or family business (as the case may be) for not less than the 120-month period beginning on the date of the bequest referred to in subsection (a). (e) Special rules For purposes of this section, the following rules shall apply: (1) Rules similar to the rules of subsections (e) and (f) of section 121. (2) Rules similar to the rules of paragraphs (4) and (5) of section 2032A(b) and paragraph (3) of section 2032A(e). (f) Treatment of disposition or change in use of property (1) In general If, as of the close of any taxable year, there is a recapture event with respect to any qualifying family farm or business transferred to the taxpayer in a bequest described in subsection (a), then the tax of the taxpayer under this chapter for such taxable year shall be increased by an amount equal to the product of— (A) the amount determined by dividing— (i) the amount of gain excluded from gross income of the taxpayer under subsection (a)(2) on the date such property was transferred to the taxpayer, over (ii) 120, and (B) the number of full months remaining in the 120-month term described in subsection (d) as of the date of such recapture event. (2) Recapture event defined For purposes of this subsection, the term recapture event means— (A) Cessation of operation The cessation of the operation of any property the sale or exchange of which to the taxpayer is described in subsection (a) as a qualifying family farm or business. (B) Change in ownership (i) In general Except as provided in clause (ii), the disposition of a taxpayer’s interest in any property the sale or exchange of which to the taxpayer is described in subsection (a). (ii) Agreement to assume recapture liability Clause (i) shall not apply if the person acquiring such interest in the property agrees in writing to assume the recapture liability of the person disposing of such interest in effect immediately before such disposition. In the event of such an assumption, the person acquiring the interest in the property shall be treated as the taxpayer for purposes of assessing any recapture liability (computed as if there had been no change in ownership). (3) Special rules (A) No credits against tax Any increase in tax under this subsection shall not be treated as a tax imposed by this chapter for purposes of determining the amount of any credit under subpart A, B, or D of part IV of subchapter A. (B) No recapture by reason of hardship The increase in tax under this subsection shall not apply to any disposition of property or cessation of the operation of any property as a farm for farming purposes by reason of any hardship as determined by the Secretary.. (b) Clerical amendment The table of sections for part III of subchapter B of chapter 1 of such Code is amended by inserting before the item relating to section 140 the following new item: Sec. 139M. Exclusion of gain from transfers of appreciated assets at death.. (c) Effective date The amendments made by this section shall apply to transfers at death by decedents dying after December 31, 2026, in taxable years beginning after such date.