How Biden May Change Inherited Asset Sales & More

Just joining us? We invite you to go back to part one. It focused on the tax rules for profits from sales of personal residences.

Part two discussed President Biden’s proposal for long-term capital gains. He hopes Congress will replace the present top rate of 20 percent for profits from sales of assets owned for more than one year with a new one of 39.6 percent––just short of double the current one.

Ahead in part three: More on his agenda, including how he targets sales of inherited assets.

Mr. Biden wants Congress to curtail long-standing rules for “step-ups” that benefit individuals who sell inherited assets that have increased in value––homes, stocks, real estate and works of art, to cite some common examples.

In tax lingo, the basis (the starting point for measuring taxable gains or losses) for inherited assets automatically steps up from their original basis (cost, in most instances) to their value as of the date of death of the owner. Put lots more plainly, it’s as if an inheritor had bought the asset from the owner that day.

What step-ups mean for heirs: forgiveness of capital-gain taxes on pre-inheritance appreciation, and, on a subsequent sale, liability for taxes only on post-inheritance appreciation. When an asset appreciates substantially over a lengthy holding period, the step-up in basis provides a considerable savings on taxes.

Here’s an example of how the current rules for step-ups apply to the sale of a home that appreciates enormously. Some years ago, Hannibal and Clarice became owners of a home that’s perched on a mountain and looks out on an ocean. Their place is within a cosseted enclave that attracts assorted A-listers, boldface names, C.E.O.s, and movers and shakers.

Add to the couple’s purchase price of $150,000, improvements of $50,000. Consequently, their jointly owned home’s adjusted basis goes from $150,000 to $200,000.

The couple’s selection steadily appreciates. By the time Hannibal dies and Clarice becomes sole owner, it’s worth $2,000,000, based on sales of comparable homes.

While her share of the adjusted basis continues to be $100,000, there’s a step-up to $1,000,000 for his one-half interest; her stepped-up basis for the entire home: $1,100,000 ($100,000 plus $1,000,000).

Clarice doesn’t remarry. Like other homes close at hand, her place continues to appreciate, particularly during 2020 and 2021––years during which, for the few who need reminders, pandemic-related deaths accelerated, stayed steady and then subsided.

Clarice’s canny crystal ball tells her to sell the home in early April of 2021 for $3,800,000, before Mr. Biden’s announces his proposal to curtail step-ups. She offsets the sales price of $3,800,000 with her stepped-up basis of $1,100,000 and a profit exclusion of $250,000, leaving her liable for taxes on the remaining $2,450,000.

How do things play out should she sell after Mr. Biden’s proposal takes effect, possibly as early as late April of 202l, when he mentions it in an address to Congress? An emboldened IRS likely will caution Clarice to submit a 1040 that shows she owes more taxes. 

How does he want the new rules to curtail tax breaks for step-ups and leave less for heirs? Continue to allow them for capital gains of up to $1,000,000 (indexed for inflation). Abolish them for gains above $1,000,000, subject to important exceptions, as when, for example, decedents arrange for transfers of appreciated assets to their U.S. spouses or to charities.

When will he require surviving spouses to recognize taxable capital gains? Not until survivors dispose of assets, which isn’t a certainty, or they die, which is a certainty.

As for charities, no recognition of taxable capital gains. But last-minute tweaks could, for example, authorize less favorable treatment for some charities.

Can President Biden and Congress cut a deal? He knows his proposals face hurdles that could prove insurmountable.

But if they can, AccountingWEB will alert the accounting community and help accountants and other tax professionals field questions from clients clamoring for immediate information on whether the changed rules help them a little or a lot or hurt them a little or a lot.

I’ll end with a personal comment about comments sent to me. Many cite current issues, such as President Biden’s proposals, particularly the one that increases the top rate for long-term capital gains for people with incomes above $1,000,000.

I realize that affluent individuals are entitled to be peeved. The proposal, if enacted, could cause them to lose more to taxes.

Then what irks me? Two kinds of comments.

First, from troglodytes who preternaturally rail against any and all tax increases. Second, from curmudgeons who argue that if the proposal becomes law, there’ll be dire consequences, such as an   existential threat to the American way of life and reduction of the World Series to three games.