Wednesday, April 14, 2021 / by Russ Phillips
How Congressional Proposals happening now MIGHT IMPACT YOU & YOUR REAL ESTATE
Do you intend to leave your home to your kids or loved ones? Current proposals in Congress are something you need to be aware of. And with rising property values locally, you may want to make your voice heard.
First, understand "Estate Tax."
Many people might look at their home and think "I'll never live in a million dollar place..." but the reality is that there are parts of the country where a million bucks doesn't buy you much. I have a friend whose brother is trying to buy in the Bay Area and he can spend up to $900k and I'm told the only homes he can afford are in high crime areas, the home is not in great shape, and it's very small. With Austin's rapid appreciation, you might find that you own a million dollar home at some point in the future.
Estate tax law in the USA currently exempts the first $11m from a person's net worth at the time of their death. This keeps most Americans from paying estate taxes (up to 55% rate) on things they bought with AFTER-TAX money in their paychecks, not to mention they may have paid sales tax on many of their belongings too.
The current administration is proposing a reduction in that exemption from $11m to $1m. If this were to pass, many, many people living in popular urban areas, their home will eat up the entire exemption. Imagine that. You spend your entire adult life building equity in your home and then at the time of your death, your kids may be forced to sell all or some of your real estate to generate the cash to pay the tax.
The article linked here is another problematic issue, dealing with "Stepped up basis." The article approaches the topic of "stepped up basis" from the lens of farms and ranches...but it can impact everyday residential homeowners too.
Here's what that means:
My friend bought his first home in the Bay Area in the early 1970's for $65,000. Today, it's worth $1.4m. Under current law, when my friend passes away, his kids inherit the home with a "stepped up basis" meaning that if they choose to sell the property, their capital gains tax will be the difference between their net after the sale and the value at the time of his death.
Under PROPOSED law, when they sell the property, there would be no "step up" in the cost basis at the time of death. Therefore the capital gains tax would be based on the difference between the net after sale (let's say it's that $1.4m number) and the ORIGINAL price paid of $65k back in the 1970's.
Under the current law situation, if the home value is $1.4m at the time of my friend's death and the kids sell it for that value soon after his death, the capital gains taxes would be minimal, as the "cost basis" is determined to be the value at the time of death.
Under the proposed law, selling the property for $1.4m (ignore closing costs for simple math) would subject roughly $1,335,000 to capital gains taxes. At a 20% capital gains tax rate, the kids would be forced to give $267,000 to the IRS in the year of the sale.
Further, the Biden Administration is proposing to increase capital gains taxes to match your income tax bracket. So when the kids sell this property (or you sell stock, your company, or anything for a profit)....the rate could reach as high as 39.6%.
This is real money. It's real tax burden, and it places huge amounts of stress on people, especially in the case of trying to pass property from one generation to the next.
Many folks who would not consider themselves "Wealthy" would be affected by changes like this.
Tax burdens created by a death in the family cause property owners to enter into "forced sale" situations, which can even worsen a bad situation. Here's an example told to me by an appraiser:
In the height of the boom in the 1980's, an older couple passed away. They owned a ranch near the intersection of I-35 and another major highway. That intersection today holds a large shopping center, among other things. Because this husband and wife died while the "boom" was still going, the IRS valued their property high....at the value as of the date of death. The value greatly exceeded the estate tax exemption amount at that time (which was about $600,000 then). The heirs received a bill for 55% of the remainder of the ranch's value as of the date of death. HOWEVER, the real estate market crashed soon after the death. So now the heirs owed the IRS a huge liability and the sale of the property didn't even produce enough money to pay the IRS bill. Nevermind that the heirs were forced to sell the ranch to generate cash to pay the estate taxes....with the crash, the cash generated BY the sale was not enough to pay the estate taxes....and the IRS still wanted the rest of "their money."
These are the kinds of things that happen when Congress makes decisions without people paying attention.
With rising real estate values, YOU could be subject to a similar situation if the administration gets their way.
What can you do about this? Contact your congressmen and tell them you're opposed. Explain to your friends how this could impact them. Help people understand how it will impact them personally, instead of letting them believe the government only imposes things like this on "those other people who are not like me."
It's not political. It's unethical.
What can you do about this? Contact your congressmen and tell them you're opposed. Explain to your friends how this could impact them. Help people understand how it will impact them personally, instead of letting them believe the government only imposes things like this on "those other people who are not like me."
It's not political. It's unethical.
