Like 1031s, the Step-Up Benefit will Survive

Like 1031s, the Step-Up Benefit will Survive

One of the few remaining wealth-management strategies for middle-class families is the ability to pass certain appreciated assets to their heirs without tax liability. Specifically, the cost basis of your rental property is “stepped up” to its current value upon your death. Your heirs only pay tax on the property’s appreciation/depreciation that occurs after inheritance.

Senator Van Hollen of Maryland believes this tax rule is a “loophole” and “an unfair advantage”.1

Seriously? Any tax benefit that requires you to die cannot reasonably be termed a “loophole” or “unfair advantage”. Yet such hyperbole has become so commonplace, the media no longer questions it. Van Hollen is attempting to twist a longstanding and rational tax rule into a populist cause against you—the folks reading this article.

The premise underlying capital-gains tax is for the government to capture the benefit you realize from acquiring and later liquidating an asset. Capital-gains tax applies to the difference between the cost basis of an asset and your net sales price. In the case of real estate, the cost basis is reduced by depreciation.

Today, when a child sells an inherited property, the IRS considers her to have acquired the property when her parent died. This makes perfect sense. Yet Senator Van Hollen wants to treat heirs as though they acquired their inherited property 10, 20 or 50 years earlier… all the way back to when their parents bought the asset. This is simply ridiculous. Unlike a gift or sale, a transfer at death is typically an involuntary event, conditioned on making the ultimate sacrifice. Loophole, he says? Dying hardly compares to some clever accountant exploiting an ambiguity in the tax code.

The scope of this “unfair advantage” should be put into context. The step-up rule is already inapplicable to the $30+ trillion of untaxed retirement accounts that constitute 1/3rd of all household assets.2  There is little outstanding capital-gains tax liability for most decedents’ actively-managed financial accounts, and bank accounts are already taxed on their income. This issue is not about wealthy dynasties escaping taxation. Notwithstanding owners of long-held stock positions or business interests, Van Hollen’s blustering is essentially an assailment on landlords.

Thankfully, individual property owners vote. As with 1031 exchanges, we are confident the “step-up” rule will withstand the current anti-taxpayer tsunami crashing through Washington. At worst, we could end up with a per-person cap on stepped-up assets at death. But do not count on your property-owning representatives in Congress to have your back. Let them know today that death is not a tax loophole. And send Senator Van Hollen a dictionary.

This is for informational purposes only, does not constitute as individual investment advice, and should not be relied upon as tax or legal advice. Please consult the appropriate professional regarding your individual circumstance.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.

1 Exclusion Seen in Capital-Gains Tax Plan, Wall Street Journal, Mar. 29, 2021
2 https://www.statista.com/statistics/940498/assets-retirement-plans-by-type-usa/

​This information is for educational purposes only and does not constitute direct investment advice or a direct offer to buy or sell an investment, and is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation. Because investor situations and objectives vary, this information is not intended to indicate suitability for any particular investor. The views of this material are those solely of the author and do not necessarily represent the views of their affiliates.

Investing in real estate and 1031 exchange replacement properties may involve significant risks. These risks include, but are not limited to, lack of liquidity, limited transferability, conflicts of interest, loss of entire investment principal, declining market values, tenant vacancies, and real estate fluctuations based upon a number of factors, which may include changes in interest rates, laws, operating expenses, insurance costs and tenant turnover. Investors should also understand all fees associated with a particular investment and how those fees could affect the overall performance of the investment.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA). 1031 Capital Solutions is independent of CIS, CAM and CIA.