What’s Going to Happen to Your Children’s Inheritance Under Biden’s Proposed Tax Plan?

5 Proposed Tax Changes

5 proposed tax changes that will have an adverse effect on real estate investors and financial planners. The US investor world is looking at President Elect Biden’s proposed tax changes with a critical eye.  While some of the proposed changes are vague and don’t offer a lot of detail.  There are 5 changes that will affect not only investors, but some will affect your average families who were hoping to pass along some inheritance to their children and grandchildren.

1. Proposed change in like kind exchanges for section 1031. Prior to the TCJA the 1031 exchange has been kind of a sacred cow. Therefore, this proposal may be a harder reach for it to pass legislation. The proposal says it will either or both limit the amount of deferred exchange to a cap of about $1 million.  Or it will limit the entire exchange, if income for the taxpayer is over $1 million.  Anything above will be taxed.

2. Proposed elimination of the section 1031 like kind exchange for vacant land into developmental sites. As a result, this will slow down new construction and continue to curb the housing inventory.

3. Proposed higher capital gains rate. The top rate would go up to 39.6%

4. Proposed a change in the estate and trusts exclusion. The current amount of $11.5 million per individual for estate tax will be adjusted down to $ 3.5 million per individual.

5. Proposed elimination of the step up in basis. This proposal will have an impact on real estate and family businesses. Currently, upon the decedent’s death the assets allow for a step up in basis. Which means, if a couple purchases rental property at $40,000, 20 years later the couple dies and the market value of the property upon death is $100,000. The beneficiary receives that asset valued at

$100,000.  Should the beneficiary decide to sell the property 2 years later at $115,000, the tax would be calculated on $15,000. With the proposed change, the beneficiary would receive that property at $40,000 thus have to pay tax on a $75,000 gain. In regard, to the inheritance of a family business that started from the ground up with only a small initial cost;

the proposed plan does not offer much detail. Will the original cost be zero….?  Would a business that paid annual income tax, now be forced to pay estate tax on the same business?  Would that be double taxation?

Happy Planning!

As your trusted Real Estate Advisor and Enrolled Agent, let me help guide you through the process.

Call me with questions,

Melissa Zimmermann, EA, Broker Owner

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