Financial Experts Caution Biden’s Capital Gains Proposal May Impact Small Business Owners

President Biden is asking Congress for higher taxes on inherited properties. As is being discussed across news channels, this may impact family with more than $1 million in gains. 

Financial experts recommend estate planning strategies now, to avoid a surprise tax bill later. 

What’s on the table: Tax inherited property gains at death which targets generational wealth transfers. 

Photo by Ketut Subiyanto

Financial experts caution this may impact more families than just affluent ones. “The largest impact on this may be small business owners.  For many of them, most of their wealth is tied to the value of the business.  This increase in capital gains tax, while geared towards those with $1 million of income, will end up hitting these middle class business owners when they are ready to sell.” said Private Wealth Advisor Homer Smith, Konvergent Wealth Partners

As it stands now, heirs may defer taxes on inherited home gains until the property is sold. There’s also the so-called “step up in basis”, which is adjusting the home’s purchase price to the value on the date of death. The Joint Committee on Taxation reports this law saves taxpayers $41 billion per year

Biden however, would like to treat home inheritances like a sale. Heirs would pay for the gains that occurred before they received the property. 

Noteworthy: STEP Act, authored by democratic Senator Chris Van Hollen,  would get rid of the so-called “Step-Up” in basis. 

Exemptions: up to 1 million for single heirs and up to 2.5 million for couples.  

While financial advisors wait to see how the language plays out, this levy would possibly be a burden to heirs who want to live in the family home but are unable to afford the tax bill. Sales of homes over $1 million have spiked by 81% from February 2020 – February 2021, according to the National Association of Realtors. 

Fortunately, there are ways to minimize a tax hit: 

  • Work with a financial professional 
  • Get a home appraisal 
  • Meet with an Estate Planning attorney 
  • Gift a home or vacation property to children while still living, using a “qualified personal residence trust”. 

Increase the home’s cost basis by: 

  • Tacking on the cost of improvements. Example: New siding, roof and/or certain property renovations. 
  • Keep immaculate records on all improvements 
  • Create a family partnership or Limited Liability Corporation 

Homer Smith is an Investment Advisor Representative with konvergent wealth partners, a Registered Investment Advisor.  This article is for informational purposes only.  Please contact your financial professional about your particular situation.

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