One of the more “radical” proposals for funding the Biden administration’s American Jobs Plan or the Build Back Better program is that it would treat any property tax transfers at death or by gift as realization events for capital gains tax purposes.
Under other administration proposals those events would be subject not only to ordinary income tax rates of up to 39.6%, but also to the 3.8% “Medicare” tax, according to Kristine Tidgren, director of Iowa State University’s Center for Agricultural Law & Taxation.
“The really radical provision within this proposal, and the one they believe has to be in here to make the increase in tax rates something that actually generates revenue, is that it would treat any property transfers at death or by gift as realizations events,” said Tidgren, a speaker for the virtual Mid-South Agricultural and Environmental Law Conference.
“What that means is that, beginning in 2022, if you die and you leave property to your heir and that property that you own had appreciated in value, you would be taxed on that transfer as though you have sold the asset, and there would be a capital gain tax trigger on your death for the amount of appreciation of that asset that had occurred during your lifetime.”
Gift vs death transfer
The same tax would apply if the property owners decided to give it away during their lifetime, although the benefit might be more generous if the owners passed it along at death as opposed to a gift.
“Nonetheless, the transfers would be subject to these new higher tax rates,” she noted. “If you're dealing with a highly appreciated asset, which, in the farming world we often are, that gain would be taxed at 43.4%.”
The administration proposal provides a $1 million exclusion for recognizing the gain at death or at the time of a gift. The $1 million exemption would be for member of a married couple. It could be shared between them so it would be portable.
“Essentially, a husband and a wife could exclude $2 million of gain and would also be able to exclude up to $500,000 on their principal residence,” Tidgren said.
“A lot of the headlines we see out there talk about the president’s plan eliminating the step up in basis. Technically, it doesn’t eliminate the step up in basis, it just eliminates the tax-free step up in basis. Under current law, the step up in basis is really the best tax benefit going – you just have to die to get it.”
If a taxpayer dies now, the current basis of an asset is stepped up to the fair market value at the time of death. “The appreciation that occurred during the taxpayer’s lifetime is never taxed, and that’s what the administration is looking at,” she said.
The administration could ask Congress to raise the tax rates on capital gains even higher, but simply raising the rates wouldn’t generate additional revenues, according to the Treasury Department’s tax experts.
“The thinking is we’re never going to raise any revenue if we don’t include a provision that makes this gain taxable,” Tidgren said. “If we have exorbitant rates, people will just hold the property until they die and wait for the gain to go away.”