Posted on 08/19/2021 7:00:06 AM PDT by Kaslin
Under the Biden administration’s tax proposal, an appreciated real estate asset owned at death could result in income taxes due that exceed the net proceeds from sale of the asset after paying existing debt. Yes, having an asset where the fair market value of the asset is greater than the debt could result in taxes at death that exceed the net value of the real estate.
Currently, an individual must have net assets in excess of $11.7 million to be subject to zero estate taxes. The proposed Biden capital gains tax at death proposal would subject individuals with net assets not in the same zip code as $11.7 million of net worth to very significant new death taxes.
Biden makes two tax proposals that would create significant new taxes at death. Capital gains tax rates would be increased to 40.8 percent for total gains that exceed $500,000. Second, Biden proposes to tax capital gains at death excluding both the $250,000 gain on sale of a personal residence plus the first $1 million of capital gains.
A taxpayer who in 1997 purchased and has continued to own a rental property as his only asset could see his new death tax suddenly be a significant portion of his net worth and possibly exceed his net worth.
Let’s assume the taxpayer purchased the property for $3 million in 1997 and its fair market value in 2021 is now $12 million. Because of 25 years of depreciation, the asset has a tax basis of $500,000. Let’s also assume that the taxpayer borrowed $2.5 million when he purchased the property and has maintained that amount of debt for 25 years.
If this was his only asset, under current tax law, the beneficiaries of the taxpayer’s estate would have no federal taxes and would be able to sell the property and receive $9.5 million tax free after payment of the debt. Under the Biden plan, the estate of the taxpayer would need to pay a new death tax of roughly $4.2 million on the appreciation that occurred during his life. His beneficiaries would pay a 47% new death tax on the estate. With the stroke of a pen, a taxpayer not subject to any death tax under current law would lose almost 50% of his assets to taxes.
It gets worse. If our taxpayer had borrowed money on this asset to invest in ventures which did not become successful, to pay for college for his family, to gamble, or to make large charitable contributions, the new death tax could swallow the entire estate. If the taxpayer had a mortgage of $7.8 million upon death, there would literally be no money for the beneficiaries after the payoff of the mortgage; a 100% new death tax. If the taxes exceed the debt, it is unclear whether the government would get paid before the mortgage holder.
In what country on earth, could a net estate after taxes be reduced from $4.2 million to zero over night by passing a new law?
The entire idea of a capital gains tax at death is an ex post facto tax on appreciation earned before the law was enacted. It is not a change in tax rates; it is a tax on events prior to enactment.
The issue at play is the very nature of the government waking up one morning and changing rules tax laws that go back 100 years. Taxpayers have understood that if leveraged assets were sold, the income tax result would be significant. Taxpayers also understood that upon death, taxes were paid on the net estate, not an imagined sale of the assets.
Taxpayers planned their estates to provide for their children. Biden’s proposals will in many cases destroy such planning. And for taxpayers caught in this vice who would still have some assets in their net estates, their first step would likely be to eliminate or reduce previously planned charitable contributions to allow some distributions to their families.
Finally, there is the look forward impact of a doubling of capital gains rates and initiating taxes on death. Investors will look elsewhere than real estate. Housing stocks will not increase and rents will increase. It is axiomatic.
I don’t see a problem with this personally;
You buy a house for $50K like 50 years ago, now it is worth $1,050,000 (million dollar appreciation).
If you sell it now, before you die, you owe taxes on it (minus the onetime lifetime exclusion if you haven’t already used it).
So pay the tax man on your appreciated assets, just like if you sold a long-term held stock.
What difference does it make if you still have debt on it?
Say you bought it for $50K, now is worth $1050,000, and at one point it was worth $1.5M instead, so you borrowed a million dollars against it and spent the money on crack. Should you be able to sell it and not owe any taxes? The fact that you (or the person you inherited from) chose to get a tax-free loan against the equity - and spent it - really should affect your tax bill.
I am all for reducing taxes in a fair way - but keeping loopholes in so that those fortunate enough to inherit wealth can get everything tax-free on things that were never taxed in the first place (i.e. the stepped up basis rule), only help a few rich/lucky people.
Cut taxes on income, cut property taxes, cut sales taxes before you start giving windfalls to heirs that never earned it in the first place.
Don’t be fooled by the ‘oh the family farmers...’, this is a loophole that allows the uber-wealthy to build dynastic wealth for generations at the expense of income earners who need to make up the difference.
“Create a Family Trust NOW!”
In Tampa area, any freeper have any local lawyers in mind ?
Can a Trust be drafted by the homeowner and filed without a lawyer ?
401k on the chopping block next. Too much money in the hands of the peasants.
Most with significant assets have already done so, so the actual impact of these absurd laws will be limited. But once the Left realizes there is no gold to be mined, they will likely try to go after trusts, also.
The Obama/Biden regime (for this is the 3rd term!) are determined to give new, and chilling meaning, to that old meme; “I’m from the government and I am here to help”! At this moment, the Administration is desperate to avoid the reprise of the 2008-10 Obama term where their control of Congress only got the Healthcare bill passed before the RINOs got back power in Congress. Right now, barring a more successful “bait & switch” 2022 campaign season, a more conservative legislature will make these proposals very unlikely to pass!
As much as I hate to say it, we conservatives must USE Biden’s epic idiocy with Afghanistan and, per Obama’s Chicagoan Chief of Staff, Rahm Emmanuel, “Not waste this crisis”!
They can change the allowed investments: "We'll take those risky stocks off of your hands - no American should have to gamble on his or her retirement! Your new Warren Federal Safety Net Bonds will pay you a GUARANTEED 3% annual return, with no more sleepless nights!"
Incorporate. Outside of the United States.
They have been eyeing our IRA’s for at least 10 years - probably longer. The massive spending and debt will create a crisis that allows them to take people’s savings because it’s “an emergency.”
I’ve said it before, and I’ll say it again. If they take my retirement money, I’ll just start robbing federal banks.
Either I’ll get my money back, or they’ll catch me and have to pay for my retirement anyway.
I can’t believe this will be passed, especially retroactively. It is immoral to change rules at the end of the game. Just like SS, no one seriously suggests cutting current benefits, only future ones, so that people can plan accordingly.
Forget the details. The intention is to take it all (except for the clintons, obamas, bezos, gates, soros).
This is another reason why they’ve deliberately ramped up inflation. (assets “appreciate” in inflated dollars, and are taxed on the “appreciation” even though it has little value.)
“...loophole that allows the uber-wealthy to build dynastic wealth for generations at the expense of income earners who need to make up the difference.”
Of course the current rules benefit the wealthy, and you can make the argument that their kids didn’t earn the windfalls. But you can make that argument for any level of inheritance, even for people of meager backgrounds.
Stepped-up basis also benefits Joe Middle Class, when he inherits his parent’s humble-sized paid-off house that they lived in for 50 years. He didn’t earn it either, but he’ll get his childhood home with no tax owed (other than keeping up with the property taxes, which is a whole other issue). But with the stepped-up basis gone, there’s a very real chance that he’ll have to unload the house to pay the hefty tax bill. And he may not have a house of his own for whatever reason. Biden’s plan would reduce the ability of regular families to pass on intergenerational wealth/property. Over time, most people will be renters to the govt/Blackrock their whole life with little tangible assets.
And I firmly believe they’ll find some way to get their claws in the IRAs too, using a whole host of excuses (covid, black reparations, etc.) Best advice is to not have all your eggs in one basket.
When I worked in Brazil back in the 90s I believe Lula was the new president and he established some terms for taxes and monetary policy. People down there said it was the first time in their lives they could plan.
Without stable tax policy, and we have none, you can’t plan.
Taxes to politicians are like reserve pits, the higher you raise them or the bigger you build them the more is spent or put in them. Or my wife and closets and drawers, the more you make she WILL fill them no matter.
Can you explain this from the post:
“Currently, an individual must have net assets in excess of $11.7 million to be subject to zero estate taxes. The proposed Biden capital gains tax at death proposal would subject individuals with net assets not in the same zip code as $11.7 million of net worth to very significant new death taxes.”
Does this mean that everyone with net assets less than $11.7 million ARE subject to estate taxes? It does not make sense to me.
The writer shifted from talking about the “estate tax” to talking about “income taxes” in the form of capital gains taxes.
bkmk
Dems do what dems do
Except it's not worth $1.05 million. It's valued at $1.05 million of overly inflated fiat dollars, brought to you by the same government that calls it an increase and wants to tax you on it.
BKMRK.
Oh yes they will! The SSA says, by 2035, if nothing changes, SS payouts will be only at 75% of current value.
So if you are getting $1000.00 now, in 2035, you will be getting $750.00.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.