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Capital Gains at Death
Posted on 1/21/15 at 1:18 pm
Posted on 1/21/15 at 1:18 pm
(I'm posting this on the Money Talk board as opposed to the Political Talk board, in hopes a logical and decent discussion can be had here)
Capital Gains
As many of you probably know and the article explains, assets transferred at death take on a new basis - the FMV of the asset at death. The unrealized gain that happened between the time the asset was acquired, and death, is never taxed. If it was sold the day before death, it would be taxed.
As an example, guy buys Google stock for $10,000. When he dies, it's worth $50,000. He leaves the stock to his son. His son takes a basis of $50,000 in the stock, and only pays tax on the gain north of $50,000, when the son sells it. The $40,000 of gain built up before death is never taxed.
Now, this makes perfect sense in a world with a low estate tax exemption - like we had pre-2000. Why? Because the estate tax is based on the full value of the asset at the time of death. So, while no one pays capital gain tax on the $40,000 gain... the estate potentially - if the estate exceeded the exemption - pay estate tax on the full $50,000 - and estate tax is higher than capital gains tax.
Now, with an exemption north of $5 million... as a matter of fairness - should we relook at this?
Any asset that is subject to estate tax should get a full step-up in basis. However, for assets that are not taxed at the estate level - I can see a reason for not stepping up the basis. Thus, when the heir sells the stock - the heir would pay the entire capital gains tax - both for the growth under the decedent and the growth under the heir. Which, again, the heir gets all the money from the sale of the stock.
Just curious what other people think about this.
Capital Gains
As many of you probably know and the article explains, assets transferred at death take on a new basis - the FMV of the asset at death. The unrealized gain that happened between the time the asset was acquired, and death, is never taxed. If it was sold the day before death, it would be taxed.
As an example, guy buys Google stock for $10,000. When he dies, it's worth $50,000. He leaves the stock to his son. His son takes a basis of $50,000 in the stock, and only pays tax on the gain north of $50,000, when the son sells it. The $40,000 of gain built up before death is never taxed.
Now, this makes perfect sense in a world with a low estate tax exemption - like we had pre-2000. Why? Because the estate tax is based on the full value of the asset at the time of death. So, while no one pays capital gain tax on the $40,000 gain... the estate potentially - if the estate exceeded the exemption - pay estate tax on the full $50,000 - and estate tax is higher than capital gains tax.
Now, with an exemption north of $5 million... as a matter of fairness - should we relook at this?
Any asset that is subject to estate tax should get a full step-up in basis. However, for assets that are not taxed at the estate level - I can see a reason for not stepping up the basis. Thus, when the heir sells the stock - the heir would pay the entire capital gains tax - both for the growth under the decedent and the growth under the heir. Which, again, the heir gets all the money from the sale of the stock.
Just curious what other people think about this.
4
Posted on 1/21/15 at 1:30 pm to LSUFanHouston
1. Estate and Gift Tax makes up less than 0.5% of the federal tax receipts. Any changes to those laws with the purpose of increasing revenue is purely driven by class warfare. It will do nothing for our economy.
2. If I inherit something, I shouldn't have to sell it to pay the damn estate taxes. If I do sell it, now you want to tax me based on what my dead relative paid for it back in the day? Also class warfare against anyone whose family has left something for their kids.
2. If I inherit something, I shouldn't have to sell it to pay the damn estate taxes. If I do sell it, now you want to tax me based on what my dead relative paid for it back in the day? Also class warfare against anyone whose family has left something for their kids.
Posted on 1/21/15 at 2:39 pm to LSUFanHouston
I would prefer there be zero estate tax regardless of amount of wealth inherited with the assets being inherited continuing to have the same cost basis of the deceased person.
So whenever the heirs sell, they will pay capital gains on the assets sold just as if the deceased person was still alive and had sold those assets.
So whenever the heirs sell, they will pay capital gains on the assets sold just as if the deceased person was still alive and had sold those assets.
Posted on 1/21/15 at 3:04 pm to LSUFanHouston
I don't think there should be a capital gains tax.
Consumption taxes reduce cheating.
Consumption taxes reduce cheating.
Posted on 1/21/15 at 3:50 pm to LSUFanHouston
How does a legatee determine the decedents adjusted basis in a closely held business interest? Do you know what your great grandfather paid for a family heirloom that you inherited but want to sell because it has no sentimental value to you?
You might as well assign zero basis and holding period to all inherited assets. Two problems that immediately come to mind. First, inherited cash would then result in an immediate tax liability at ordinary rates. Second, what happens if I own 500 shares of IBM, I inherit another 500 shares, and subsequently sell 200 shares of IBM? What ordering rules should apply to the shares I sold?
You might as well assign zero basis and holding period to all inherited assets. Two problems that immediately come to mind. First, inherited cash would then result in an immediate tax liability at ordinary rates. Second, what happens if I own 500 shares of IBM, I inherit another 500 shares, and subsequently sell 200 shares of IBM? What ordering rules should apply to the shares I sold?
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