Capital Gains Basis Step-up

[Arkady]

I'm wondering what people here thought about the idea of eliminating basis step-up for inherited capital. Currently, when you inherit an asset, your tax basis for it is as if you bought the asset at the price it had at the time of inheritance, meaning much of the capital gain will never be taxed. If your benefactor bought a stock at $10, you inherited it at $100, and you sell it at $120, you only pay capital gains on $20 of the gain, instead of the full $110 that it actually appreciated since purchase.

This is a strange rule. Why should I, as someone who is merely handed wealth, get better tax treatment than the original investor? Yet, that's what's happening. If the original owner were to sell it, he would pay taxes on the whole gain, yet if I, as an heir, sell the exact same asset for the exact same price, I don't. It's another one of those weird quirks of our tax code that effectively reward you more the less you do to actually deserve your wealth. You're taxed more if you earn money through labor than if you "earn" it through investing, and more if you "earn" it through investing than if you're handed it as inheritance.

Changing this rule, so that people inherit the original basis, would make our tax system more consistent while generating additional revenues.

 

[SW48]

I'm wondering what people here thought about the idea of eliminating basis step-up for inherited capital. Currently, when you inherit an asset, your tax basis for it is as if you bought the asset at the price it had at the time of inheritance, meaning much of the capital gain will never be taxed. If your benefactor bought a stock at $10, you inherited it at $100, and you sell it at $120, you only pay capital gains on $20 of the gain, instead of the full $110 that it actually appreciated since purchase.

This is a strange rule. Why should I, as someone who is merely handed wealth, get better tax treatment than the original investor? Yet, that's what's happening. If the original owner were to sell it, he would pay taxes on the whole gain, yet if I, as an heir, sell the exact same asset for the exact same price, I don't. It's another one of those weird quirk of our tax code that effectively reward you more the less you do to actually deserve your wealth. You're taxed more if you earn money through labor than if you "earn" it through investing, and more if you "earn" it through investing than if you're handed it as inheritance.

Changing this rule, so that people inherit the original basis, would make our tax system more consistent while generating additional revenues.

Should pay tax on the full gain absolutely.

I almost don't believe this loophole exists its so strange.

 

[Lukey]

I'm wondering what people here thought about the idea of eliminating basis step-up for inherited capital. Currently, when you inherit an asset, your tax basis for it is as if you bought the asset at the price it had at the time of inheritance, meaning much of the capital gain will never be taxed. If your benefactor bought a stock at $10, you inherited it at $100, and you sell it at $120, you only pay capital gains on $20 of the gain, instead of the full $110 that it actually appreciated since purchase.

This is a strange rule. Why should I, as someone who is merely handed wealth, get better tax treatment than the original investor? Yet, that's what's happening. If the original owner were to sell it, he would pay taxes on the whole gain, yet if I, as an heir, sell the exact same asset for the exact same price, I don't. It's another one of those weird quirk of our tax code that effectively reward you more the less you do to actually deserve your wealth. You're taxed more if you earn money through labor than if you "earn" it through investing, and more if you "earn" it through investing than if you're handed it as inheritance.

Changing this rule, so that people inherit the original basis, would make our tax system more consistent while generating additional revenues.

It's because of the estate tax. Taxing the estate and then charging the heirs capital gains taxes is double taxation. I know the thought of that gets you progressives salivating, but it just becomes one more reason for people not to accumulate capital. I know, I know, that's the point of this effort, right? And you folks don't like it when we suggest your viewpoints are neo-Marxist...

 

[SW48]

It's because of the estate tax. Taxing the estate and then charging the heirs capital gains taxes is double taxation. I know the thought of that gets you progressives salivating, but it just becomes one more reason for people not to accumulate capital. I know, I know, that's the point of this effort, right? And you folks don't like it when we suggest your viewpoints are neo-Marxist...

Arkady didn't mention it was already taxed. I don't know who is right to be honest. If it was already taxed then I don't have a problem with it. If it wasn't then it needs to be taxed on the whole gain. I don't know how it could be taxed with the estate if it wasn't sold?

Someone is incorrect here.

 

[Craig]

It's because of the estate tax. Taxing the estate and then charging the heirs capital gains taxes is double taxation. I know the thought of that gets you progressives salivating, but it just becomes one more reason for people not to accumulate capital. I know, I know, that's the point of this effort, right? And you folks don't like it when we suggest your viewpoints are neo-Marxist...

You crack me up.

The ol' "double taxation" ruse. Transactions are taxed so money may have been taxed 372 times...depending on the flow of the money. Or...it may never have been taxed at all. The estate I inherited was tax free. It was shy of the millions allowed to move in such fashion so no burden, no multiple taxation was applied. Such is the case for the vast majority of estates, as you well know.

Limits allow folks to inherit some capital. Inherit. Not earn nor accumulate. Inherit.

 

[Lukey]

Arkady didn't mention it was already taxed. I don't know who is right to be honest. If it was already taxed then I don't have a problem with it. If it wasn't then it needs to be taxed on the whole gain. I don't know how it could be taxed with the estate if it wasn't sold?

Someone is incorrect here.

It's not me! The "step-up" provision for inherited property was implemented to a) provide an incentive for people to accumulate capital (back when USA was a capitalist country) and b) to disallow double taxation on the same asset when it is taxed under the estate tax provision.

 

[SW48]

It's not me! The "step-up" provision for inherited property was implemented to a) provide an incentive for people to accumulate capital (back when USA was a capitalist country) and b) to disallow double taxation on the same asset when it is taxed under the estate tax provision.

But how can you pay a tax gain in an estate on a stock that wasn't sold?

 

[Lukey]

You crack me up.

The ol' "double taxation" ruse. Transactions are taxed so money may have been taxed 372 times...depending on the flow of the money. Or...it may never have been taxed at all. The estate I inherited was tax free. It was shy of the millions allowed to move in such fashion so no burden, no multiple taxation was applied. Such is the case for the vast majority of estates, as you well know.

Limits allow folks to inherit some capital. Inherit. Not earn nor accumulate. Inherit.

So charge capital gains on all estate transfers and do away with the estate tax. Problem solved!

 

[Lukey]

But how can you pay a tax gain in an estate on a stock that wasn't sold?

Based on a current value as of the date of death. Another problem is the trickiness of valuing some illiquid assets, but it has to be done for the estate tax return anyway. Our whole tax system is riddled with such anomalies and idiosyncrasies, which is why I advocate scrapping it entirely and replacing it with something a lot less intricate.

 

[Craig]

So charge capital gains on all estate transfers and do away with the estate tax. Problem solved!

But....but....but...it's double taxation!!!

I'd be ok with that. I'm done with it, so it won't matter to me. Our nephew may get slammed by our generosity upon our death if a straight cap gains was applied. If a 20% cap gains tax was applied, he gets a $600,000 house for $120,000. Is a good deal, no? And if all exchanges are taxed, it's likely to be a lower figure, making the deal even better.

 

[Lukey]

But....but....but...it's double taxation!!!

I'd be ok with that. I'm done with it, so it won't matter to me. Our nephew may get slammed by our generosity upon our death if a straight cap gains was applied. If a 20% cap gains tax was applied, he gets a $600,000 house for $120,000. Is a good deal, no? And if all exchanges are taxed, it's likely to be a lower figure, making the deal even better.

Where it gets sticky is with small, closely held businesses (and farms). They often have a fairly high market value but there's often not a lot of cash available to pay the tax. So you end up with family businesses and homesteads getting liquidated so the tax man gets his share. Is that a good thing? I don't think so. Sure, smart people can use life insurance and other methods to deal with the tax, or you can make exceptions for these situations where, depending on the amount the heirs get five to seven years to pay the tax due. More complications in our life to keep feeding the big government monster that is turning us all into slaves. Count me an opponent...

 

[Craig]

Where it gets sticky is with small, closely held businesses (and farms). They often have a fairly high market value but there's often not a lot of cash available to pay the tax. So you end up with family businesses and homesteads getting liquidated so the tax man gets his share. Is that a good thing? I don't think so. Sure, smart people can use life insurance and other methods to deal with the tax, or you can make exceptions for these situations where, depending on the amount the heirs get five to seven years to pay the tax due. More complications in our life to keep feeding the big government monster that is turning us all into slaves. Count me an opponent...

I don't think it happens. Not enough to matter.

 

[Lukey]

I don't think it happens. Not enough to matter.

Then why did they come up with this:

https://conversations.wfmagazines.com/article/deferring_estate_taxes_on_a_closely_held_business_with_irc_6166

And this:

http://www.claconnect.com/Agribusiness/Changes-in-Farm-Estate-Tax-Benefit-Farmers-and-Owners.aspx#.VL-4LsbkZK0

 

[Craig]

Then why did they come up with this:

https://conversations.wfmagazines.com/article/deferring_estate_taxes_on_a_closely_held_business_with_irc_6166

And this:

http://www.claconnect.com/Agribusiness/Changes-in-Farm-Estate-Tax-Benefit-Farmers-and-Owners.aspx#.VL-4LsbkZK0

There are easy ways to allow transfers with little to no tax obligation. If a "family" cannot come to agreements on these methods, then they do not deserve the property at all, in my opinion.

I do chuckle..."assume" a 9% yearly increase in RE valuation...therefore, I will "assume" greater profits as well. Why wouldn't they be able to secure a loan for 10% of the highly profitable and extremely valuable property that they had little to do with building?

 

[Lukey]

There are easy ways to allow transfers with little to no tax obligation. If a "family" cannot come to agreements on these methods, then they do not deserve the property at all, in my opinion.

I do chuckle..."assume" a 9% yearly increase in RE valuation...therefore, I will "assume" greater profits as well. Why wouldn't they be able to secure a loan for 10% of the highly profitable and extremely valuable property that they had little to do with building?

10%? You assuming we'll drop the rate to 10%? If that were all it was, there'd be no problem. I though Obama wants to chuck it back up to 28%? Now if the business or farm is carrying some debt already (that the decedent used to keep it going during the Obama depression), you might run into some problems.

 

[worldlymrb]

It is every patriotic American's duty to hand over every dollar to the state upon death, so as to pay for more wars, illegals welfare and pay off over $5,000 trillion in toxic derivatives to offshore central banking cartels.

All in the name of democracy of course.

 

[Lukey]

It is every patriotic American's duty to hand over every dollar to the state upon death, so as to pay for more wars, illegals welfare and pay off over $5,000 trillion in toxic derivatives to offshore central banking cartels.

All in the name of democracy of course.

Amen!

We all need to become compliant slaves to big brother!

 

[Craig]

10%? You assuming we'll drop the rate to 10%? If that were all it was, there'd be no problem. I though Obama wants to chuck it back up to 28%? Now if the business or farm is carrying some debt already (that the decedent used to keep it going during the Obama depression), you might run into some problems.

If EVERY exchange was taxed, my initial thought it that the rate would be lower. No?

 

[Craig]

Amen!

We all need to become compliant slaves to big brother!

To some degree, yes.

Benjamin Franklin to Robert Morris

25 Dec. 1783

Writings 9:138
The Remissness of our People in Paying Taxes is highly blameable; the Unwillingness to pay them is still more so. I see, in some Resolutions of Town Meetings, a Remonstrance against giving Congress a Power to take, as they call it, the People's Money out of their Pockets, tho' only to pay the Interest and Principal of Debts duly contracted. They seem to mistake the Point. Money, justly due from the People, is their Creditors' Money, and no longer the Money of the People, who, if they withold it, should be compell'd to pay by some Law.

All Property, indeed, except the Savage's temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.


http://press-pubs.uchicago.edu/founders/documents/v1ch16s12.html

 

[Lukey]

If EVERY exchange was taxed, my initial thought it that the rate would be lower. No?

You and I could make that deal. Obama and the Repubs? Not so much...