Possible future elimination of step up basis

[pb4uski]

^^^ Yes. Why should taxpayers provide the heirs with a tax-free $195k gain that would result from a stepped up basis? even if the growth in the value of the home was only due to inflation?... it is still a gain. That is part of the reason why capital gains tax rates are lower than ordinary income tax rates.

I can see an argument for treating such assets transferred to a non-spouse as if they were sold by the decedent at their death... so in the example that you provided if the decedent met the principal residence test at their date of death then the kids would have a year to sell and get the principal residence exclusion on any gain. If it wasn't a principal residence then no exclusion but LTCG treatment with carryover basis.

Adjusting the tax basis of assets for inflation is a bigger moral hazard.

[Sand101]

Quote:

Originally Posted by pb4uski ^^^ Yes. Why should taxpayers provide the heirs with a tax-free $195k gain that would result from a stepped up basis? even if the growth in the value of the home was only due to inflation?

Taxpayers aren't providing anything. The government is taking, either by inflation or by confiscation, the labor of the parents. The true value of the house never changed - the government is dishing out quite the penalty for dying here. Let's not forget it is government policy, carried out unflinchingly year after year, that degrades the value of our labor.

I believe you and I will always have a different definition of moral hazard. Inflation is insidious, a slow burn. Easy to ignore, easy to justify (unless we're talking minimum wage, in which case it's an abomination...).

[pb4uski]

Poppycock. Possibly interesting theory, but that is all it will ever be.

To keep it simple let's say the primary residence exclusion doesn't apply.

If dad sells then the government collects tax on a $195k gain for the $220k proceeds from the sale in excess of the $25k basis... let's say $29k at capital gain tax rates and kids inherit $191k in cash after the taxes are paid.

OTOH, if dad dies, the kids inherit and the basis steps up to $220k and they sell then the gain and tax are $0 and they walk away with $220k in cash. There is no doubt that the stepped up basis ends up with the kids getting $29k more... increasing the national debt by $29k because of the $29k of lost tax revenue.

The value of the house is what it would fetch in a sale to an unrelated third-party... and the value does change over time with changes in supply and demand.

Tax basis has never been indexed to inflation and probably never will be... so get over it.

[Koolau]

Quote:

Originally Posted by pb4uski Poppycock. Possibly interesting theory, but that is all it will ever be. To keep it simple let's say the primary residence exclusion doesn't apply. If dad sells then the government collects tax on a $195k gain for the $220k proceeds from the sale in excess of the $25k basis... let's say $29k at capital gain tax rates and kids inherit $191k in cash after the taxes are paid. OTOH, if dad dies, the kids inherit and the basis steps up to $220k and they sell then the gain and tax are $0 and they walk away with $220k in cash. There is no doubt that the stepped up basis ends up with the kids getting $29k more... increasing the national debt by $29k because of the $29k of lost tax revenue. The value of the house is what it would fetch in a sale to an unrelated third-party... and the value does change over time with changes in supply and demand. Tax basis has never been indexed to inflation and probably never will be... so get over it.

Okay, are you saying you don't like the tax code as currently written? Guess what. Nobody does! Of course, YMMV.

[pb4uski]

No, you need to read posts 20-24 to get the context. I don't really care but stepped-up basis is an odd gift to heirs in the code.

The poppycock was in response to a suggestion that tax basis be adjusted for inflation... interesting theory but never going to happen.

Quote:

Originally Posted by pb4uski The stepped-up basis has always been a very odd part of the tax code. I can clearly see a stepped-up basis for inherited assets where the decedent's estate has paid estate taxes in that they have paid the tax and therefore get the stepped up basis. But for stiuations where there is no estate tax paid it seems like an unjustifiable freebie to heirs to me.

[CardsFan]

Quote:

Originally Posted by pb4uski Poppycock. Possibly interesting theory, but that is all it will ever be.

Poppycock? My Grandfather would use that term. I guess that means we are all getting older.

In all seriousness, I agree with you in principle, And your idea that the heirs get the normal CG exclusion for a house makes sense.

The issue is, millions of people have planned their estates for the current tax code. Yeah, I know they can change it at any time, but this is a big one.

[6miths]

Quote:

Originally Posted by pb4uski The stepped-up basis has always been a very odd part of the tax code. I can clearly see a stepped-up basis for inherited assets where the decedent's estate has paid estate taxes in that they have paid the tax and therefore get the stepped up basis. But for situations where there is no estate tax paid it seems like an unjustifiable freebie to heirs to me.

+1

It always seemed to me that this was the rich getting richer in a rather artificial and unfair way. What is the rationale that expected capital gains taxes should not be paid on an asset as they would at any other time. If one wanted to carry the original ACB forward until the sale by heirs that would seem reasonable but to wipe out the tax liability? Not so reasonable.

My understanding was that one of the things that the founding fathers wanted to avoid was to have large amounts of money concentrated in relatively small numbers of families - a new aristocracy. This seems like one of those measures that will lead to just this. It seems to me that the average middle class person benefits very little (and the poor suffer) from this bit of tax code the rich are making a killing on it. Do the rich need this tax break? Of course I may have it totally wrong.

[youbet]

Quote:

Originally Posted by CardsFan Poppycock? My Grandfather would use that term. I guess that means we are all getting older.

No, not really. It means pb4uski is getting older.

[pb4uski]

Hey... I'm not even 65 yet.... but its hard not to concede to getting older.

[youbet]

Quote:

Originally Posted by pb4uski Hey... I'm not even 65 yet.... but its hard not to conced to getting older.

64 going on 85!

[pb4uski]

Thanks a bunch!

[triangle]

It would create the problem of holding the heir responsible for knowing and calculating basis. Should an heir be legally bound and punished (tax penalties) if later determined they received bad information from the now deceased?