Possible future elimination of step up basis

[MrLoco]

As I am sure most know, the future may hold a change in the tax code eliminating the step up in cost basis for inherited assets. This would obviously affect any heirs inheriting those assets. In our case our children.

Wonder how one might prepare or change one's portfolio to preserve this benefit? Any loopholes? We have ( as I am sure many do) etf's and mutual funds in taxable accounts that have appreciated substantially over the years.
If we sell while alive, we pay the gains while alive. After death, the kids will pay and they will need good records of deceased parent's cost basis.

Any thoughts?

 

[pb4uski]

A couple things.

If your income is low enough, LTCG are taxed at 0%. The limit for a married couple for 2020 is taxable income of $80,000, which equates to $107,400 for a married couple over 65 after you add in the standard deduction.... and another $300 to that if you do charitable contributions. So if you have headroom there you can gains trade a little each year.

Another option if would be to do charitable contributions with appreciated securities rather than cash.

 

[PandaBear]

I think about this as my mom and dad purchased a home in what is now a very HCOL area 50 years ago. Our step up as heirs will be huge. Not really sure if there is anything to do so I will be curious what is posted.

Of course, an idea in a tax plan doesn’t mean it will happen. It will also depend if the senate stays republican or changes to a democratic majority.

 

[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.

 

[pb4uski]

I think about this as my mom and dad purchased a home in what is now a very HCOL area 50 years ago. Our step up as heirs will be huge. Not really sure if there is anything to do so I will be curious what is posted. ...

IF stepped up basis went away, I wonder if the heirs could "buy" the home from mom and dad with seller financing and then mom and dad elect out of installment sale treatment and take advantage of the sale of residence gain exclusion.

Simultaneously, the "buyers" would execute a long-term lease for the home to mom and dad at a fair value rent. The seller financing payments due from the buyers to the sellers and the rent due from the sellers to the buyers would largely offset... and any difference could be an annual gift from one party to the other.

 

[Sunset]

I think about this as my mom and dad purchased a home in what is now a very HCOL area 50 years ago. Our step up as heirs will be huge. Not really sure if there is anything to do so I will be curious what is posted.

Of course, an idea in a tax plan doesn’t mean it will happen. It will also depend if the senate stays republican or changes to a democratic majority.

(Just my random thoughts)

If your parents sold the house to you, the first $500,000 in profits would be tax free to them.

I do wonder, does this great exemption get lost if they both died and the house was inherited by heirs ?

Could they "sell" the house to their own trust or LLC to absorb the exemption and raise the basis of the house for when the LLC sells the house to distribute to heirs.

<edit: both pbuski and I posted at the same time>

 

[MichaelB]

Let’s please keep politics out of the discusssion.

 

[PandaBear]

Let’s please keep politics out of the discusssion.

My apologies.

 

[Montecfo]

This is not proposed legislation at this point, and I seriously doubt it can become law.

But brokers track basis now. I do not see that as a hurdle there. With homes I would expect you would continue some favorable treatment for personal residences. For investments perhaps not.

"How much pain have cost us the evils that have never happened"

- Thomas Jefferson

 

[Gill]

This has been proposed for at least 50 years and fortunately has never been enacted, or never permanently enacted. I remember calculating the value of my father's portfolio in the mid '70's because that was supposed to be the starting date (I believe 12/31/76) for legislation that was passed at that time and eventually repealed.



The argument against it has always been that the present system gives a fresh start for many individuals who do not even know their basis. Also, the classic objection has always been with an asset such as a coin collection where each individual coin has its own basis but with the impossible task of determining that basis. I believe that if it is ever enacted there will be a starting date whereby you would be taxed on the gain from the starting date to the date of sale. I believe this is the system in Canada. Let's hope it's never enacted here.


Gill

 

[james7]

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.

I agree with you that this has always been an unjustifiable freebie to heirs. Also, there has been talk of doing away with the 1031 exchanges, but there have been warnings that this move would crater the commercial real estate market.

 

[Gill]

I agree with you that this has always been an unjustifiable freebie to heirs. Also, there has been talk of doing away with the 1031 exchanges, but there have been warnings that this move would crater the commercial real estate market.

Don't forget at one time all estates over $60,000 were subject to estate tax. The stepup was designed to somewhat offset the estate tax that was paid on those assets. Also, repeal would create a huge administrative problem and record keeping task for taxpayers.
Gill

 

[pb4uski]

...Also, repeal would create a huge administrative problem and record keeping task for taxpayers.
Gill

How would that be? For most assets the taxpayer is already supposed to keep track of their basis right now. If step up were eliminated it wouldn;t be any different than if they received the asset as a gift... and people seem to deal with that ok now.

 

[Gill]

How would that be? For most assets the taxpayer is already supposed to keep track of their basis right now. If step up were eliminated it wouldn;t be any different than if they received the asset as a gift... and people seem to deal with that ok now.

I can tell you that people don't deal with it now. It's very common for people to have no idea what their basis is on their holdings. In an estate, the personal representative is tasked with determining basis when the decedent didn't have adequate records. Furthermore, we're not just talking about securities. This would apply to real estate and assets such as coin and stamp collections. Each individual coin and stamp has its own basis. I've administered hundreds of estates and I assure you I would have found in most estates it would be very difficult to determine the decedent's basis in his assets.

Gill

 

[MichaelB]

Let’s keep in mind this is not legislation under consideration. It’s not even a legislative proposal. If it ever reaches that stage, it should then have enough detail to discuss, and worry about implementation and impact.

 

[pb4uski]

Gill... I believe you. I said deal with it... not easily deal with it.

I was guardian for my great aunt and liquidated her portfolio in anticipation of needing the money for her nursing home costs and determining basis was definitely a challenge.

I wonder if people would be more serious about doing better recordkeeping if stepped up basis wasn't available and they became "scared" that much of ther legacy to heirs would ultimately go to the government in taxes if they didn't keep good records.

 

[Stormy Kromer]

I don't think it would be all bad. I see so many older people holding onto assets that they could sell to their children but won't because they're waiting to give it to them when they die to get the stepped up basis ( and avoid paying capital gains taxes, which are super low.) I see this a lot with farmers and business owners, they just won't sell their farm or business when they're alive. The trouble is they often live into their 90's and their kids who worked in the family business are in their 60's or even 70's and haven't gotten to buy in yet because dad won't sell. If these laws ever do change you might see some life insurance products become more attractive.

 

[Koolau]

I agree with you that this has always been an unjustifiable freebie to heirs. Also, there has been talk of doing away with the 1031 exchanges, but there have been warnings that this move would crater the commercial real estate market.

The tax code is full of winners and losers. Solar energy comes to mind. (I realize that's a different section of the tax code but everyone knows about it just like they know about the step up basis for heirs.) We could all argue about our particular favorite (or least favorite) tax break but it's one of those truisms that once granted, taking away a tax break is nearly impossible. I have no insight on this, but just going from past experience. YMMV as always.

 

[ckelly78z]

Help the future heirs while you are still living, by giving them cash gifts of just below the max amount every year. It would be cool to see the smiles on their faces when you hand them this. I copy/pasted this;

"Annual per person limits apply
The simplest rule to keep in mind is the “federal annual gift tax exclusion.” This limit is $15,000 per person in 2018 and can change each year.Dec 5, 2018"

 

[Sand101]

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.

Mom and dad buy a house for $25,000 in 1960 in Wayouthere, ID. Parents die and in 2020 kids sell the house for $220,000. You think the kids should carry the house at a 25k basis, despite the fact that the inflation adjusted value is exactly the same?

Talk about moral hazard. At the least if the step up is eliminated cap gains should be able to be adjusted to inflation adjusted values. Eliminating the first and blithely ignoring the second is let them eat cake territory.

 

[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]

^^^ 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]

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.

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.