Will Biden eliminate the 'Step up' policy for inherited assets?

https://www.forbes.com/advisor...

I am concerned because we are looking to sell the one and only property we have inherited from a relative this coming Spring or summer.

Could we get screwed by this?  If it was put into law this year, would it take effect for tax year 2021 (part of me doubts this)?

If the 'Step Up basis' for inherited assets is taken away in the near future (even if after 2021), then using a 1031 exchange this year on an inherited investment property may be the wrong move as a we would end up paying a lot more capital gains tax in the future when we do sell.  Would it be better to forget using 1031 and just take the smaller capital gain hit now under current law.  Am I missing something or is my thinking correct?

I miss the boring days when there was not that much difference (compared to today) between Democrat and Republican tax policy.  Was much easier to plan.

All of the 1031 Exchange & DST guys I've talked with think the step up basis is more likely to get the axe than the 1031.

If the Step Up Basis does get the "axe"... that means that it would only apply in the future at the time of death for someone willing property correct?  Meaning that someone holding RE that was inherited in the past will not be affected.

Well, upon death, what do you intend on doing:

1) Keeping the prop in the family?  Then I'd call an atty about trusts with rights of survivorship.

2) Selling upon death?  BOHICA, you'll be paying on the full cap gains, it sounds like.

Hi Steve.  We inherited property in 2012 from a relative.  That is my primary concern currently and how changes in tax law will affect our upcoming sale of the property this year.  We may use a 1031 exchange if able.

When laws are written they typically take effect at that time or at a specified point in the future. They do not take effect retroactively. So there is virtually no chance you would have an issue if you have already inherited the property.

Thanks much Russell.  :)

When laws are written they typically take effect at that time or at a specified point in the future. They do not take effect retroactively.

Don't go to Cali then.  They pass a tax bill on 1 Sept, they'll make it retro to 1 Jan.  Biden's talking about doing the same thing.

@Hans Cooke it is hard to do tax planning around inheritance, beyond proactive measures like a trust. The tax law is what it is when someone dies. You can't change when you inherit something and you can't control if they make tax law proactive, although I agree with @Russell Brazil that making it proactive is highly unlikely. Tax cuts may be made in the current year, but generally not tax aggressive policies.

Keep in mind that the highest value houses are inherited in blue states, so eliminating step up basis would impact democratic constituents the most. For that reason I see this unpopular, but it could be implemented based on income level or gains. Too much to speculate about and you sure shouldn't be worrying about it.

For those worried about tax law changes, here is my advice:

1. Contact your elected officials and let your position be known.

2. Follow any legislation as it progresses so you are educated on what is coming.

3. React only when it is prudent, meaning take action when something is real. Don't make bad decisions based on a hypothetical.

All great info and advice Joe.  Thanks!  #3 is spot on.

Under Supreme Court precedent, Congress has to expressly make its intent known that a new statute is to apply retroactively to past activities but it certainly has that power outside the criminal law context.  Polishing up my crystal ball, I am expecting a fight on dropping the long-established step-up in basis on inheritances such that we will likely end up with some kind of income limit and/or exemption for principal residences, etc.  I also expect the estate tax exemption limit to drop from $11.5 million to something like $2.5-$3.5 million as well as additional restrictions on 1031 exchanges if not a wholesale abandonment of this other longstanding rule.  .   

Write your local congressmen and let them know how you feel is a laughable strategy in this political climate . These people don’t give two $&@@) what you think as constituents ! They are die hard communists that will fleece your last penny anyway they possibly can . You think there’s certain investments they won’t touch for the fear of backlash ? That’s naive in my view

This isn't just a Biden thing. They are doing it all over. Look at Prop 19 in California, it's complete 🐂💩. Look at all the money they are printing, unemployment, PPP, EIDL, etc. They have to get the money from somewhere and people that are not investors are not as sympathetic to heirs receiving tax benefits for assets they did not "earn". I'm especially concerned because I live in California and have been investing solely in California for my children to inherit from my hard work....and now, not as much. Will people still get inheritance yes, but Uncle Sam is making sure they get a cut.

Originally posted by @Steve Morris :

When laws are written they typically take effect at that time or at a specified point in the future. They do not take effect retroactively.

Don't go to Cali then.  They pass a tax bill on 1 Sept, they'll make it retro to 1 Jan.  Biden's talking about doing the same thing.

Yeah, Cali has always been a special place in figuring out how to take someone's money.  And the future VP is from Cali so probably will advise him on how Cali works.

I think that some people would like to force people who inherit a house to have to sell it so that it is available to someone else to buy with the housing shortage in CA.  If the taxes are due upon inheritance, that is a good motive for someone to sell, and if more is due when it is sold, some people may want to sell and invest elsewhere.  Win-win for those hoping to make more housing available to the renters.

Originally posted by @Lynnette E. :

Originally posted by @Steve Morris:

When laws are written they typically take effect at that time or at a specified point in the future. They do not take effect retroactively.

Don't go to Cali then.  They pass a tax bill on 1 Sept, they'll make it retro to 1 Jan.  Biden's talking about doing the same thing.

Yeah, Cali has always been a special place in figuring out how to take someone's money.  And the future VP is from Cali so probably will advise him on how Cali works.

I think that some people would like to force people who inherit a house to have to sell it so that it is available to someone else to buy with the housing shortage in CA.  If the taxes are due upon inheritance, that is a good motive for someone to sell, and if more is due when it is sold, some people may want to sell and invest elsewhere.  Win-win for those hoping to make more housing available to the renters.

 

Are you referencing Prop 19 in CA?

https://www.boe.ca.gov/prop19/

People complaining their inheritance is going to be taxed. You guys have it very tough. I am sorry you have to go through this. 

Originally posted by @Frank Breetz :

People complaining their inheritance is going to be taxed. You guys have it very tough. I am sorry you have to go through this. 

 I know you are being sarcastic, but since you have never been through this situation I will tell you its not the same as just selling a house of your own.  When you sell your own house, you know how much you paid for it.  You know what other things were paid at purchase to add to the basis.  You know the major improvements--room additions, new roof, etc. that was done that add to the basis, and their costs.  When the property is inherited you do not know any of that information.  Or maybe some of it can be found, with a lot of effort, but not likely all of it.  

End result is that you set the basis too low because you can not prove that the room addition cost a certain amount if you were audited.

Also if you sell your primary residence you get either a $250k or $500k increase in basis tax free.  But because the resident passed away that basis offset is totally lost with an inheritance if the step up basis is removed.

You may think that with an inheritance any thing you inherit is good, and it is, but when you see how much is taxed, it is crazy, even more so if in a state with low qualifying inheritance or estate taxes.  

You may think that inheriting a house is a major score, but most houses that are inherited likely have a mortgage.  Also someone has to pay that until the house sells.  That and taxes and insurance are taken off the 'profit' when selling a house.  Then you split the proceeds between how ever many inherit it and not much is left in many cases.  For my mom's house that was sold after her death 11 people inherited from it.  Not much for any single person.  And for the work I did, I likely did not even earn minimum wage.

I agree with @Lynnette E. Our government is in the theft business. These laws are designed to steal assets from elderly, windows, children, and grandchildren. You cannot avoid this painful truth. The fact that some people get jealous of hard working individuals who add value to the community does not justify taking what is not yours.  If you or I did this we would be put in jail. Penalizing innovators and high achievers will cause the smart ones to vote with their feet.  Elon is moving from CA to Texas, for instance.

Originally posted by @Chad Nelson :

I agree with @Lynnette E. Our government is in the theft business. These laws are designed to steal assets from elderly, windows, children, and grandchildren. You cannot avoid this painful truth. The fact that some people get jealous of hard working individuals who add value to the community does not justify taking what is not yours.  If you or I did this we would be put in jail. Penalizing innovators and high achievers will cause the smart ones to vote with their feet.  Elon is moving from CA to Texas, for instance.

Explain to me how receiving inheritance from mommy and daddy is "adding value to the community". Maybe if you want something you should have to work for it.

People radically underestimate how the desire to pass something on to their kids (and/or to leave a legacy) drives economic activity.  It would have been much easier to sit on a couch in my underwear eating cereal out of a box and waiting for the Big Man in the White House to send me a sustenance check rather than working 80 hours weeks for 25 years (including through six months of chemo) to build something of value that I could, should I choose to do so, pass on as a legacy in the manner in which I saw fit rather than being handed out as pork to scoundrels and malingerers by our politician class.  

Of course, the impact taking another 40% bite out of one's assets (including inflation fat as well as capital gain muscle) is not readily susceptible to measurement except, perhaps, through a longitudinal study.  I do not know what motivated others but I know what motivated me.  One factor was a rule that has been engrained in our law since time immemorial and was last seriously attacked in 1976.  One should be able to rely on settled law.   

Originally posted by @Frank Breetz :

Originally posted by @Chad Nelson:

Explain to me how receiving inheritance from mommy and daddy is "adding value to the community". Maybe if you want something you should have to work for it.

Inherited properties add value to the community.  The inherited rentals often continue to be rented property.  This allow many people to have homes rather than be homeless.  It also allows many people to live in neighborhoods that they could not ever afford to buy a house in.  It allows some people to get better jobs because they can rent a house in an area with better jobs.

Inherited farms allow the diversity of crops and keep local people employed.  It provides food more often to a local community rather than shipping it off to far away places.  It also allows the farm to remain a farm rather than being left to become a wasteland as abandoned farms often become.   By allowing the inheritance, rather than selling it to pay the government taxes, allows the family to keep the farm as a family owned farming business.

 Now for the 'you should have to work for it' part of the comment:

Many times inheritances WERE worked for. Example: My parents had 3 rentals when I was growing up.  They bought the first one when I was about 5 years old.  When they passed way they still had two rentals left which were inherited by 11 heirs.  

As a child I started painting the closets and inside the cupboards of the rentals, as did my brothers.  As our skills improved we moved on to window and trim painting, then eventually to use the rollers on the walls.  By the time we were ten we could change out washers in facets and replace facets and toilet guts.  We replaced plants, whatever came up that needed to be done, my brothers and I were there working.  We cleaned every time there was change over.  I learned how to balance a check book and track receipts by the time I was in Jr. High.  As my parents got older, my oldest brother, then I, took over managing pretty much everything with the rentals.  

But these were my parent's property.  They got the money.  We got the experience.  When they passed away, then we inherited.  But did we work for it?  Yes!

For my rentals, my two 17 year old have laid over 10,000 square feet of vinyl plank flooring.  (Have you done that?  Its a killer even on young knees!)   They have pulled up the floor and replaced failing joists in 3 houses.  They have painted the inside of 4 apartments and 4 houses.  They have demoed kitchens and bathrooms and decks.  They have trimmed bushes, cut grass and removed brush and overgrowth.  They have removed layer upon layer of old carpet, down to horsehair padding.  They keep the records for the properties that they are assigned.

They work, sometime 40-50 hours a week! They work hard! 

Many family businesses for farms and small rental businesses work this way.  The whole family does the work, but it remains in the parent's name and is the parent's until their death.  

Don't for a minute think that the kids are getting something they did not work for!

I do acknowledge that there are families like the Gates where the kids just exist and inherit, but most family businesses, not corporate, have kids that are very involved in the work.  And most inheritances do not even involve a business, just grandma's house.