Taxes seem to be one of the most prevalent things that will come to us this year, as President-elect Biden has mentioned quite a few worrisome things in regards to taxing. To summarize, taxes are bound to increase – but one of the things to consider is the so-called “step up tax” that Biden has brought up since the summer of 2020. Although this change isn’t very noticeable from the start, it’s also going to affect almost everyone under traditional tax law.
According to the current traditional tax law, certain assets that are usually passed to heirs upon death – like a home, real estate, or even family businesses – have their value “stepped up” at the time of the decedent’s death to the fair market value at that time.
For example, if your parents still own the home you grew up in, and they bought that in 1980 for $75,000, upon their death in, say, 2019, the value of that home is assumed to be the fair market value of the home in 2019.
Let’s keep the math simple and say that value is $150,000.
As the heir, you now have an asset worth $150,000, and if you decided to sell it in 2020 for $160,000, then you’d only pay taxes on the $10,000 difference between the value upon your receipt of the home and the sale.
In the plan that seems to keep showing up, you, as the heir, would be taxed on the entire value change of the home from the time it was built or purchased.
So, $160,000 minus the purchase price of $75,000.
In other words, $85,000.
Here’s the challenge: there are so many other pieces of any tax puzzle, these smaller pieces often get forgotten about, but in the case of the family home, which is usually the largest single asset any of us will ever own, the tax consequences could be very large. Items like this rarely get a lot of press, because it’s a once-in-a-lifetime problem versus a once-a-year problem, like April 15th.
It’s worth watching and determining a better course of action before losing tens of thousands of dollars in taxes because your family wasn’t aware of the tax consequences that are often introduced and never fully explained to citizens.
Even if President Biden gets his “wish list” of tax hikes, the reality is, it might take several years to actually get put in place. That’s great, because it gives us time to work together to determine how best to attack the problem and mitigate the tax consequences of passing a real estate asset to your heirs.
If you’ve suddenly begun to worry, relax: just keep an eye on this and go ahead and schedule a time to discuss how to keep more money in your heir’s pockets.
Of course we are also here to help you with other issues pertaining to accounting as well, so contact us today to learn more.