Just about three weeks after Republican senators introduced a bill to permanently repeal the federal estate tax, the Wall Street Journal reported Monday that Democratic senators proposed a plan to tax unrealized capital gains at death.
Sen. Chris Van Hollen, D-Md., released a discussion draft of the bill, which would eliminate stepped-up basis that heirs receive for property. Typically, heirs don't pay capital gains until they sell an asset – stock, land, etc – and that comes after they receive the stepped-up basis in the value of that asset.
The WSJ reported Van Hollen released the bill with Sens. Cory Booker, D-N.J., Bernie Sanders, I-Vt., Elizabeth Warren, D-Mass., and Sheldon Whitehouse, D-R.I. A companion bill was also introduced by Rep. Dan Pascrell, D-N.J., a member of the House Ways and Means Committee.
The Joint Committee on Taxation estimates the exclusion of capital gains at death amounts to about $42 billion in assets that will go untaxed this year. Eliminating the stepped-up basis would generate capital gains on those assets passing to the heirs, excluding a $1 million per-person exemption.
Currently, under the estate tax, the personal exemption is $11.7 million for 2021. The estate tax generated $13.2 billion in taxes in 2019, of which 1.7% of the assets came from farms.
Taxing the capital gains on a farm might look something like this. A 1,500 Iowa farm bought in 2000 for the state land average value at the time, $1,857 per acre, would have cost $2,785,500. That 1,500-acre Iowa farm in 2020 is now worth a statewide average of $7,559 per acre. That puts the value at $11,338,500.
Those per-acre numbers come from the average value of farmland in the annual Iowa State University surveys for 2000 and 2020.
If the farmer passes away, that 1,500 acres would more than likely pass to an heir without a federal estate tax, falling just under the current $11.7 million exemption (recognizing other factors and assets would also come into play).
Under the Democratic capital-gains proposal, $1 million in land value would be exempted. Then $10,338,500 would subtract the basis land cost $2,785,500, leading to $7,553,000 in gain. That $7.5 million would subject to the 20% capital gains taxes – leading to potentially $1.5 million in tax liability.
That's a simple example, not taking into account any other circumstance, or asset. Still, the proposal by Van Hollen and others would lead to a significant shift in the taxing of estates, and how farmland is sold.
The bill would maintain current personal exclusions for homes -- $250,000 for an individual, $500,000 for a married couple.
The Wall Street Journal noted the Biden administration “is weighing eliminating the current rules for stepped-up basis in the coming legislative push on infrastructure, education and child care.” The president could unveil his proposal for infrastructure, and how to pay for it, as soon as Wednesday.
There then remains the significant question of getting such a change in capital gains and stepped-up basis through a 50-50 Senate. Nearly every member of the Republican caucus signed on to the bill early in March to eliminate the estate tax.
Chris Clayton can be reached at Chris.Clayton@dtn.com
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