To help fund $1.5 trillion dollars in new spending, President Biden wants to eliminate the “stepped-up basis” applied to inherited assets. The President is selling this as a tax on “the rich.” However, contrary to what the President, Senator Warren and others say, eliminating the “stepped-up basis” will definitely be detrimental and costly for middle income earners. In my practice I see many people who fit the middle-income category and inherit a house from their parents.
Here are examples of 1) how the stepped-up basis works today for someone inheriting a house, and 2) how that same person would fare under President Biden’s proposal.
- How the stepped-up basis works today. Let’s say your parents purchased a house in 1995 for $200,000. When they passed in 2021 you inherited the house, the value of which had increased to $600,000. The basis, which is used to calculate the capital gain, would not be the $200,000 your parents paid in 1995. Instead, the basis “steps-up” to the value at the time of death which would be approximately $600,000. So you have no capital gain, therefore no capital gain tax.
- Now, the same events under President Biden’s proposal.
You sell it in 2021 for the same $600,000. However, your basis does not “step-up,” you must use your parents’ 1995 basis of $200,000. So, with a sales price of $600,000 minus the $200,000 basis, you will have a capital gain of $400,000. $400,000 gain X 20% tax rate = $80,000 tax liability.
Even if you hold on to the house, maybe you live in it for some years and then sell it, your basis would still be the $200,000.