Are You Ready for Capital Gains Tax at Death?
February 11, 2021
We are starting to see more chatter about assessing a capital gains tax at death (or during life). Both President Joe Biden and Sen. Ron Wyden, D-Ore., (the likely Senate Finance Committee chair) is pushing for this.
Some of the proposals we have seen would impose an immediate capital gains tax on marketable securities. If marketable securities are transferred to a non-spouse either during life (a gift) or at death, a capital gains tax would be imposed. This gain would be reported on the individual tax return.
Understand Interest Costs
A capital gains tax on farms and small businesses would be likely deferred until the asset is sold. However, this deferral is not free. Interest would likely be assessed based on the amount of deferred tax.
Let’s suppose that a farmer dies owning $3 million of grain that is transferred to his daughter. Under current law, no income tax is owed by dad and the daughter can sell it for $3 million and owe no tax. The proposed rules would likely impose a capital gain (or ordinary income taxes) on the $3 million of grain but it would not be payable until the daughter sells the grain.
Let’s assume the tax is $1 million and the daughter waits three years to sell the grain. If the interest rate is 5%, then the daughter would owe $1.15 million when the grain is sold (the million of tax on the grain from dad plus interest of $150,000).
Some people would argue it is extremely difficult to determine how much granddad paid for the back 40 in 1955. It appears that this "cost" basis could be valued based upon the current fair market value less an imputed "interest" adjustment back to the date of purchase if no cost basis is available.
Also, any transfer to a non-spouse during lifetime would trigger the capital gains tax. There would likely be some type of base amount that would not be subject to the tax and certain items of property would be exempt. Any income tax imposed would be deductible for estate tax purposes.
A step-up in basis in farm assets would occur under this provision, however, the offset is immediate tax in some situations. This is a very complicated process and it may not go anywhere, but you are forewarned that this will be discussed in Congress and there is probably at least a 50% chance that it will happen in some form or another.