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As the Biden administration seeks funding for unprecedented levels of government spending, they are targeting three sacred cows of the U.S. tax code:  long term capital gains rates, the step-up in basis of assets at death, and 1031 exchanges.  Here are some details of these proposed changes.

  • Capital gain rates – Under Biden’s proposal, long term capital gain rates would increase to a maximum of 39.6% from the current rate of 20% for taxpayer’s with over $ 1 million of income. This represents a small percentage of the population but that income threshold could eventually come down.  There is talk that this change could be made retroactive, which means that capital gains already realized in 2021 could potentially be hit by the increased rates.
  • Step-up in basis – Under current law, unrealized capital gains are eliminated at death because the heirs are allowed to take assets with a cost basis equal to the fair market value at the date of death. They only pay tax on the appreciation after the prior owner’s death and then only if they sold the assets.  This tax-free step up in basis has been part of the tax code for 100 years.  Under the Biden plan, these unrealized gains would be taxed immediately upon death.  There would be an exemption allowed of $ 1 million per person and the tax would not apply to assets given to charity.
  • 1031 exchanges – Currently, individuals can defer capital gains on asset sales if they meet certain requirements and funds are used to purchase a replacement property. Again, this has been a mainstay of the tax code for years and is used by many real estate investors.  The Biden proposal would cap the deferral of gain at $ 500,000.

Remember that these are only proposed changes at this point and could be drastically amended before final legislation is passed.  With slim margins in the House and Senate, Democrats could face opposition in their own party so these proposals are far from being a slam dunk.

We are committed to serving your tax preparation and tax planning needs.  If you have questions about these proposals or any other tax matters, please contact our office.  In the meantime, we will keep a sharp eye on what’s happening in Washington!

The information in this blog post is general in nature and not intended as specific advice.  Please consult a tax advisor to see how this information applies to your specific situation.