Gabriel Katzner - September 13, 2021 - Estate Planning
Biden New Estate Planning Tax

The Biden administration has been exploring the idea of eliminating the step-up in basis rule or at least modifying it. The American Families Plan Fact Sheet says that:

“The President would eliminate the loophole that allows the wealthiest Americans to entirely escape tax on their wealth by passing it down to heirs. Today, our tax laws allow these accumulated gains to be passed down across generations untaxed, exacerbating inequality. The President’s plan will close this loophole, ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.”

If this plan should become law, many individuals and families may need to revisit their estate planning goals.

What is Basis?

According to the IRS, basis is the amount of your capital investment in property that is used for tax purposes. In most cases, the basis of an asset is how much you spent on it. This includes your cash spending, debt obligations, and other property or services. This value is used to calculate capital gains or losses when a piece of property is transferred from one owner to another. The term cost basis is applied when referring to the cost of acquiring a property. Cost basis may also be called tax basis.

Imagine you:

  • Purchased a piece of unimproved land in 2000 for $20,000
  • Your neighbor offers $100,000 for the land in 2021
  • You evaluate your neighbor’s offer and decide that it is a fair offer, so you accept it
  • Your profit (capital gain) on the sale is $80,000

You would need to report the $80,000 capital gain to the Internal Revenue Service and your state tax authorities. You would likely need to pay federal and potentially state taxes on your capital gain. Many factors contribute to exactly what your capital gains tax would be, but federal capital gains taxes range from 0 to 20 percent.

If you had purchased the property for $100,000, but could only sell it for $80,000, you would experience a capital loss. If this should happen, you may be able to report capital losses that can be used to offset other capital gains you may have earned from selling other assets. Your tax adviser is your best resource to help you manage your capital gains and losses.


What Is Stepped-Up Basis?

Stepped-up basis is defined in Section 1014 of the United States Tax Code. This code states that when a person inherits a piece of property, the new basis equals its fair market value at the time of the decedent’s death, not the original purchase price.

Going back to the land purchase example:

  • You purchased a piece of unimproved land in 2000 for $20,000.
  • You left the piece of land to your child in your will or trust.
  • At your death, the fair market value for the land was $100,000.
  • Your child sold the land to your neighbor for $100,000 shortly after your death.

The fair market value of the property was $100,000, so your child could sell the land and pay little to no capital gains taxes. For highly appreciated land, company stock, or a family business, this can be a way to pass assets from one generation to the next with significant tax savings.

What is Carry-Over Basis?

If you should transfer your land to your child as a lifetime gift, either directly to them or in an irrevocable trust, this is carry-over basis. Since the transfer of ownership was not upon your death, the basis of the property would be the same for both the gift recipient and the giver.

Going back to the land purchase example:

  • You purchased a piece of unimproved land in 2000 for $20,000.
  • You deed the property to your child before you die or make an irrevocable gift of the property to a trust for the benefit of someone other than yourself.
  • Your child sells the property.
  • The basis of the property is the same as it would have been for you, as is the capital gains.

Comparing the difference between carry-over basis and stepped-up basis, you can see that transferring the property upon death is a strategy many use to decrease their capital gains tax burden.

Occasionally, it makes sense to give away your property during your lifetime. For example, if your piece of property rapidly appreciates or your estate is large enough that it is subject to estate taxes, it may be wise to transfer the property out of your estate to avoid the 40% estate taxes that will be incurred when the property passes to your beneficiaries without being protected by the estate tax exemption at your death.

What Should You Do?

At this point, it is too soon to tell whether the Biden administration will be able to push this tax change through Congress. Be sure to call us if you have any questions about your estate planning.

You are welcome to schedule a call with us or reach us directly at 855.434.2062 to learn more about how best to plan today to protect those most important to you.

Online Appointment Request

Schedule Consultation  


Call Our Office

  (855) 528-9637