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Should Inherited Property Be Taxable at the Owner's Death?

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President Joe Biden has released more detailed information about various facets of his ambitious tax plan. Under current rules, taxpayers who inherit property benefit from a step-up in basis at the time of the original owner’s death — meaning that the basis of inherited assets is “stepped up” to the fair market value of the property on the date of the owner’s death. Biden’s original tax plan proposed repealing the basis step-up going forward.

In a surprise twist, however, Biden’s plan would not only repeal the stepped-up basis, but taxpayers who inherit property would be required to recognize gain at the time of death. In other words, inheriting property that had appreciated would be a taxable event even if the individual does not immediately sell the inherited property. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about this new twist on the proposal to repeal the stepped-up basis rules.

Below is a summary of the debate that ensued between the two professors.

Bloink: Repealing the stepped-up basis rules is only the first step toward requiring wealthy Americans to pay their fair share on asset transfers. The richest Americans can avoid any tax liability even with the repeal — simply by hanging on to the assets and hoping for a more favorable future tax regime. Requiring these taxpayers to recognize gain once they actually receive the asset, regardless of whether they sell, ensures that taxpayers are paying at least a portion of their fair tax liability based on overall wealth. 

Byrnes: Requiring all beneficiaries to immediately recognize gain on asset transfers at death is completely unworkable — and patently unfair. It creates a system of double taxation, something that our tax code generally doesn’t tolerate. Assuming the deceased person’s estate is subject to the estate tax, which Biden also plans to increase, the property could be immediately subject to both the estate tax and income or capital gains tax


Bloink: We’re talking about the richest Americans who can game the system and avoid paying what’s fair — not ordinary taxpayers who transfer only modest assets. Double taxation would be an issue only for the wealthiest Americans who have held on to assets, sometimes for generations, without paying any taxes at all. In fact, the current proposal exempts $1 million in asset transfers for each individual decedent from the new recognition rule.

Byrnes: More and more taxpayers will likely be exposed to the estate tax if Biden gets his way— and then they’re also forced to pay income/capital gains taxes to boot? That forces taxpayers into selling assets that they might not otherwise want to sell. How would they have the funds to pay the tax liability without selling the asset and actually benefiting from the appreciation in value? 


Bloink: We all know that if this rule becomes law, middle-class Americans who transfer only modest assets at death will be exempt. Our government isn’t trying to bankrupt ordinary Americans who’ve done nothing but inherit property from loved ones. The modifications are designed to capture those significant assets that the wealthy pass from generation to generation, using tax minimization strategies to avoid paying their fair share.

Byrnes: At the bottom line, the proposed system would be completely unworkable from a practical, administrative standpoint. We’d be talking about a system where each and every asset that’s ever transferred at death would have to be valued and taxed even if the heir isn’t planning to dispose of the property. This new rule would spell a death knell for the family business and family farm once beneficiaries learn that they can’t afford to both keep the business running and pay Uncle Sam at the same time.

Their Votes:




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