{"id":1144,"date":"2020-12-21T06:00:51","date_gmt":"2020-12-21T11:00:51","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=1144"},"modified":"2024-04-25T23:20:27","modified_gmt":"2024-04-26T03:20:27","slug":"real-estate-tax-changes-could-be-coming-spotlight-on-capital-gains-and-the-stepped-up-cost-basis","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/real-estate-tax-changes-could-be-coming-spotlight-on-capital-gains-and-the-stepped-up-cost-basis\/","title":{"rendered":"Real Estate Tax Changes Could Be Coming: Spotlight on Capital Gains and the Stepped-Up Cost Basis"},"content":{"rendered":"\n
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A new administration might bring real estate tax changes. No\nmatter what happens in this area, it\u2019s worthwhile to know what\u2019s going on that\nmight affect your plans to bequeath your real estate. So here we take a look at\ntaxes on capital gains, and then at one form of tax relief that\u2019s now a complete\nquestion mark: the stepped-up cost basis of real property for your heirs.<\/p>\n\n\n\n\n\n\n\n

Capital Gains: What They Are, How They\u2019re Taxed<\/h2>\n\n\n\n

Capital gains are the increase in value that you\u2019ve earned\non an asset, such as your home, at the time you transfer the deed to someone\nelse. What you paid for the house is its tax basis. The amount of appreciation\nyou realize if you sell your home, over and above that tax basis, constitutes\nyour taxable gain. <\/p>\n\n\n\n

Therefore, capital gains, like other forms of income, are\ntaxed. This does not become an issue until the year you transfer the deed to\nsomeone else. In the best tax scenario, you don\u2019t transfer your house quickly\nafter buying it. If you sell the home in the first year you own it, you pay the\nhigher short-term capital gains<\/em> rate, so it\u2019s like having regular\nincome. <\/p>\n\n\n\n

But long-term capital gains <\/em>receive a tax advantage. If you keep your home for more than a year, you pay a much more comfortable tax rate<\/a> on those gains. Longevity has its rewards! <\/p>\n\n\n\n

Now, for 2021: <\/em><\/strong>Will capital gains tax go up<\/a> after a change in administrations? Likely so. But for now, this change will only affect people who have an income of more than a million per year.\u00a0 <\/p>\n\n\n\n

OK, what about exclusions?<\/em><\/strong> You may use the\ncapital gain exclusion allowance \u2014 $250,000 an individual taxpayer, $500,000\nfor a couple filing jointly \u2014 if you\u2019re selling a home that\u2019s been your primary\nresidence for at least two of the past five years. You\u2019ll need to wait at least\ntwo years after your sale to qualify for this exclusion again. <\/p>\n\n\n\n

Pro tip:<\/em><\/strong> The IRS may permit a partial exclusion from capital gains tax (\u201cpartial exclusion of gain<\/a>\u201d) if you are forced to sell your primary home because of a life change.<\/p>\n\n\n\n

Stepped-Up Cost Basis: Are Your Heirs About to Lose It?<\/h2>\n\n\n\n
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An administration change in 2021 may mean the end of the stepped-up\ncost basis, which currently lets heirs sell inherited homes without steep\ncapital gains taxes. It might or might not happen, because Congress will have a\nsay in whether it\u2019s approved or not. But it\u2019s being discussed. So, it should be\non every homeowner\u2019s radar.<\/p>\n\n\n\n

First, a quick refresher on the stepped-up cost basis.<\/p>\n\n\n\n

As noted above, a home that appreciates in value while you\nown it earns you a profit \u2014 a capital gain \u2014 when you sell. But if you don\u2019t\nsell, and instead bequeath the home, are your beneficiaries taxed on the home\u2019s\nentire rise in property ever since you first acquired it? <\/p>\n\n\n\n

No. The tax code does not leave the heirs with the taxable\ncapital gains burden of the person who passed away. When will or trust\nbeneficiaries inherit the home, there is simply no sale, and therefore no\nincome to be taxed. <\/p>\n\n\n\n

Will they have to pay taxes on your increase in value if\nthey turn around and sell the house? No, not even then. Today, if you bequeath\nyour home to someone through a will or a living trust, the beneficiaries get to\nstart with the value of the home at its fair market value when you pass away.\nThey receive their own new tax basis from that \u201cstepped-up\u201d value. By avoiding\ntaxation on the entire rise in value of the home since you first acquired it,\nyour beneficiaries can dramatically reduce their taxable capital gains if they\nsell the home. This has been a key provision for families that wish to save on\ntax costs and pass wealth from one generation to the next. <\/p>\n\n\n\n

What Is the Purpose of Changing These Tax Provisions?<\/h2>\n\n\n\n

The policy debate involves whether or not a long-untapped possible\nsource of tax revenue should be captured.<\/p>\n\n\n\n

From the federal government\u2019s point of view, the step up in\ntax basis for beneficiaries means that profit gained from the property during\nthe deceased owner\u2019s life simply goes untaxed. Moreover, the stepped-up basis offers\nthe highest benefits to the people who hold the largest, most lucrative assets.\nThat\u2019s why there\u2019s pressure to end this provision. <\/p>\n\n\n\n

If this tax break ends, the transfer of the home upon death will be a taxable event. The estate would have to pay capital gains<\/a> on behalf of the deceased. The taxed \u201cincome\u201d would be the rise in market value from the original date the deceased person acquired the home to the date of the transfer. And this will happen whether or not the beneficiaries want to sell the house or keep it.<\/em> <\/p>\n\n\n\n

\u261b<\/strong> <\/strong>Have you inherited real estate? Here\nis your guide\nto selling an inherited home<\/a> under the current tax code, as well as\nalternatives to selling the bequeathed property.<\/strong><\/p>\n\n\n\n

Clearly, the proposed real estate tax changes, if enacted\ninto law, will shift a great deal of wealth away from homeowners and away from the\nbeneficiaries of their wills and trusts. Meanwhile, the federal government will\ngain a great deal of revenue. This new revenue stream would be available to\nfund the new administration\u2019s expansion of affordable medical care plans. <\/p>\n\n\n\n

From the taxpayers\u2019 perspective, this change, if enacted,\nwill create new burdens. If you are a homeowner, you\u2019ll need to make sure the\nbeneficiaries of your will or trust have verifiable information on your original\ncost basis of the home. Keep this information with your estate documents. This\nway, you anticipate possible changes and offer information that helps your\nbeneficiaries through probate, and helps your personal representative through\nyour final tax return process. <\/p>\n\n\n\n

The Importance of Seeking Professional Advice<\/h2>\n\n\n\n

Successful deed transfer planning is both situation-specific\nand highly sensitive to the current tax codes, both federal and state. Your tax\npro can guide you in contrasting the tax burden impacting a deed transfer under\nthe current code versus under the new provisions which could become enacted. <\/p>\n\n\n\n

So, if you are assessing your current estate plan, or contemplating\ntransferring substantial assets, speak with your tax expert for professional advice.\nWe also strongly encourage beneficiaries to obtain legal advice from a neutral\nlawyer with experience in the matter before they transfer the deed to their\ninherited home.<\/p>\n\n\n\n

What Other Changes Will Impact Owners, Buyers and Sellers Ahead?<\/h2>\n\n\n\n

We see several important trends on the horizon,\nSpecifically, we:<\/p>\n\n\n\n