
The stepped-up basis rule enables families to pass property down from one generation to the next without paying capital gain tax on the increase in the property’s value over time. Many wealthy people have used this rule, sometimes considered a “loophole,” to bypass capital gains taxes. Accordingly, the Biden administration has proposed a new tax bill to eliminate this rule along with proposed changes to federal estate tax. For information on federal estate tax, please see our blog post titled “Proposed Changes Federal Estate Tax.”
As the stepped-up basis rule currently stands, if a beneficiary inherits property which was worth $100,000 when originally purchased, but is worth $500,000 at the owner’s death, the beneficiary acquires the property at a basis of $500,000 and any gains beyond that may be taxed upon sale of the property. If this rule were removed, however, the beneficiary would acquire the property at a tax basis of $100,000 and would be required to pay tax on the capital gains of $400,000. Biden’s plan does, however, consider an exclusion of up to $500,000 for personal residences.
Removing the stepped-up basis rule would essentially “make death a taxable event even for families below the current estate tax exemption threshold ($11.7 million in 2021)—significantly broadening the scope of the United States’ death and inheritance taxes.” FBETC_Stepped-Up_Basis_Report_2021. Presently, it is unclear whether the stepped-up basis rule will be removed. It is important, however, to be prepared for these potential changes by considering an estate plan which will protect your assets. The attorneys at Simpson, Jensen, Abels, Fisher & Bouslog, P.C. are experienced in handling complex estate planning issues. Contact us at (515) 288-5000 to discuss your goals with our firm.
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