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re: Capital Gains at Death
Posted on 1/21/15 at 3:25 pm to makersmark1
Posted on 1/21/15 at 3:25 pm to makersmark1
quote:
I don't think there should be a capital gains tax.
Hell Yes
ETA: By hell yes, I mean no taxes on the sale of an asset. Not eliminating the benefit of the separate tax.
This post was edited on 1/21/15 at 3:27 pm
Posted on 1/21/15 at 4:16 pm to Bear Is Dead
The real estate is the real big issue here. Most of the time if you have held income producing real estate long enough then the cost basis is reduced to zero.
If you are investing in real estate then you more than likely will keep leverage (loans) on the property so you can continue to grow a portfolio by reallocating your equity in property elsewhere.
Eventually there is no way to sell the property because the basis can actually be negative and the net proceeds after the loan is paid off will be used almost exclusively for taxes. In some cases the tax is more than the proceeds.
This is from an article I found that shows the point. For example your dad dies and leaves you his real estate. It has a fair market value of $1,000,000 and is subject to a mortgage of $800,000. Thus, the equity is worth $200,000. Also assume the property has a cost basis of $50,000. If the property were sold, the gain subject to income tax would be $950,000 resulting in income tax of approximately $237,000 assuming a combined state and Federal tax rate of 25%. Under that scenario, the tax would be $37,500 greater than the equity. To dispose of that property, the owner would have to come "out of pocket" to pay the taxes. If it were possible to transfer that property to heirs, absent a basis step up, you would be transferring a net liability after taking into account income taxes. Contrast this with the estate tax liability (assuming a 50% rate). The estate tax would be $100,000, $137,000 less than the income tax liability inherent in the asset.
The only option left is for the property to be passed on to heirs at a stepped up basis.
If you are investing in real estate then you more than likely will keep leverage (loans) on the property so you can continue to grow a portfolio by reallocating your equity in property elsewhere.
Eventually there is no way to sell the property because the basis can actually be negative and the net proceeds after the loan is paid off will be used almost exclusively for taxes. In some cases the tax is more than the proceeds.
This is from an article I found that shows the point. For example your dad dies and leaves you his real estate. It has a fair market value of $1,000,000 and is subject to a mortgage of $800,000. Thus, the equity is worth $200,000. Also assume the property has a cost basis of $50,000. If the property were sold, the gain subject to income tax would be $950,000 resulting in income tax of approximately $237,000 assuming a combined state and Federal tax rate of 25%. Under that scenario, the tax would be $37,500 greater than the equity. To dispose of that property, the owner would have to come "out of pocket" to pay the taxes. If it were possible to transfer that property to heirs, absent a basis step up, you would be transferring a net liability after taking into account income taxes. Contrast this with the estate tax liability (assuming a 50% rate). The estate tax would be $100,000, $137,000 less than the income tax liability inherent in the asset.
The only option left is for the property to be passed on to heirs at a stepped up basis.
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