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JLeslie's avatar

What's the story with Biden changing how taxation works on inheriting property?

Asked by JLeslie (61774points) October 31st, 2020

I’m seeing republicans posting on facebook that Biden wants to pass legislation regarding inheriting the family house.

This is what a friend wrote: Did you know Biden wants to get rid of something called “stepped up basis”? How does this affect you? When your parents pass and leave you the family house, normally you would inherit that property at what it is worth today. If you were to sell that house you would only pay taxes on the gain from what it is worth today and what it sells for. If Biden does away with “stepped up basis,” you will inherit the property for what your parents paid for the property. If you decide to sell you will pay taxes on the difference between the original purchase price and what it sells for today.

Do you know anything about it? I asked her if it falls within the $12 million per person exemption? If it does, still most people probably won’t be taxed at all, and she didn’t know.

Here is an article also

If it does change do you agree with the change?

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9 Answers

elbanditoroso's avatar

I don’t know about it, but any person with a brain in their head knows that Biden can’t change this sort of thing with the assent of both houses of Congress.

So I would consider this a scare tactic (politically motivated) until there’s legislation to react to.

Also, @JLeslie Forbes rejects people with ad-blockers, so I couldn’t read more than the first paragraph of the article.

JLeslie's avatar

@elbanditoroso You aren’t missing much not reading the article.

For sure it’s a scare tactic. The Republicans constantly put out scare tax policy, that’s their schtick. I find most people to be completely clueless about how actual tax law works and especially lower to mid income tend to have no idea how many loopholes higher income people can benefit from.

I realize Congress would need to go along, but that doesn’t change that maybe Biden has talked about this, or maybe it’s on his website I don’t know.

SavoirFaire's avatar

Yes, Biden wants to eliminate the stepped-up basis exemption. No, it does not fall within the $12 million per person exemption (but see below for why that doesn’t necessarily matter).

What is stepped-up basis? Under normal circumstances, if you buy something for $100,000 and sell it for $500,000, you pay a tax on the $400,000 gain. But if your parents buy something for $100,000, you inherit it when it’s worth $400,000, and you sell it for $500,000, then you only pay a tax on $100,000 worth of gain. The basis of your tax liability is “stepped up” to the value of the asset when you inherited it (that is, when it was last transferred) rather than the value of the asset when your parents bought it (that is, when it was last purchased).

The stepped-up basis is sometimes considered a tax loophole because it allows people to completely avoid taxes on the majority of an asset’s capital gains by passing it on to their heirs. And to the extent that it is a loophole, it benefits a person more the wealthier they are because (1) it is easier for wealthier people to afford the upfront legal costs of making the necessary arrangements, (2) more of their assets will be subject to the highest rate of capital gains (capital gains can be taxed at 0%, 15%, or 20% depending on the size of the gain), and (3) there are other ways to reduce your tax liability on an inherited home (which is largest single asset that the average person will inherit in their lifetime, and thus the most likely asset to fall within the 20% bracket).

THAT SAID, there are two major caveats to keep in mind. First, the stepped-up basis exemption is the easiest and most flexible way of reducing your tax liability on an inherited home. So anyone who is unaware of or not in a position to take advantage of the other methods will pay more taxes under Biden’s plan as it is currently structured. Second, the economists who advocate eliminating the stepped-up basis exemption (a group which includes both conservative and liberal economists) also advocate for lowering capital gains taxes as part of the change. This is not currently part of Biden’s plan (though it could be an unstated assumption, or it could be that it’s being withheld so that it can be offered as a concession during negotiations).

If whatever legislation that comes out of Biden’s plan includes a reduction in capital gains taxes and some sort of special exemption for inherited homes, then it is likely that the vast majority of Americans would never see a difference in their tax liability (and possibly even a decrease). If that legislation does not include such measures, however, then many Americans will see a difference in their tax liability (specifically, an increase), and it could be reasonably construed as a violation of his promise not to raise taxes on households with incomes under $400,000 per year. It’s hard to see how his plan gets through Congress without these provisions being included, but it’s worth keeping an eye on it.

Tropical_Willie's avatar

Only dictator Trump changed tax laws by Executive order (no more Social Security taxes collected) !

Taxation law would go through proper channels in Congress !

JLeslie's avatar

Again, I’m not talking about Biden doing an executive order. I’m asking about opinions on the plan.

Do Republicans think Biden will just order it? That’s actually an interesting question I had not even thought of until this Q.

@Tropical_Willie Did Trump actually change social security taxes? Or, just babble about it?

Tropical_Willie's avatar

The collection of SS taxes was made optional, Trump EO for defferal of SS Taxes.

Has to be paid back on April 1, 2021. . . . maybe !

elbanditoroso's avatar

Optional for non-government workers. Mandatory for federal employees.

JLeslie's avatar

@Tropical_Willie Oh yeah, I forgot about that. I am pretty sure very few companies are doing it. Not in the private sector anyway. I didn’t know federal workers had to do it until right now. The only sense it made was for some self employed people maybe.

filmfann's avatar

It’s nonsense, unless you are inheriting multimillion dollar ranches.

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