Biden’s American Families Plan: What it means for tax free transfer of your assets to your kids?

I discussed in my last blog that Biden’s tax policy might do away with step up in basis. And here we are. The American Families Plan is out and “hidden” there is a provision that proposes to do just that. This may negatively impact intergenerational wealth transfer of many California home-owning families.

Step-up in basis works this way. Currently, if you buy an asset (stock, real estate, or other assets) at $1 and the asset appreciates to $100 at the time of your death, when your heir or beneficiary inherits the asset, they inherit it as if they bought the asset at time of your death. Their basis, or their cost so to speak is $100, and if they turn around and sell the asset at the time of death, they get it capital gains tax free. All of $100 goes to them tax free.

No more, or almost no more, says the American Families Plan. The American Families Plan Fact Sheet released today describes the change in tax as such,

“The President’s plan will close . . .  the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity.”

Step up in basis will be allowed up to $1 million and $2.5 million per couple with real estate exemptions. Any gain more than that would have to be donated to charity or will be taxed as capital gains.

In California, many families hold highly appreciated real estate. They hope to transfer this appreciation to their beneficiaries tax-free. Many Californians in the Bay Area or other high property value areas who have held real property long term will be negatively impacted by this provision.  

The American Families Plan Fact Sheet continues:

“ The reform will be designed with protections so that family-owned businesses and farms will not have to pay taxes when given to heirs who continue to run the business.”

It is not clear exactly how the asset would have to be used for to be considered a business. Would a single-family home rented to third party be considered a business?

The Washington Post article linked and posted below goes into further details on Biden’s proposal to do away with step up in basis.

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