Capital gains at death
The proposal will also change how large estates will pay tax on appreciated assets at death. Currently an asset’s unrealised gain is not subject to capital gains tax at death. The asset gets a step-up in basis, meaning the heirs obtain a basis in the inherited asset of the market value at the date of death. Heirs could then sell their inherited assets immediately, and not pay any capital gains tax.
Under Biden’s proposal, the step-up in basis for capital gains purposes at death will no longer apply for any gains of more than $1million. The unrealised gains in excess of $1million (or $2million per married couple) would be subject to a capital gains tax upon the deceased owner’s death. This could be at a rate of up to 43.4% as above.
There are, however, relief measures being proposed for the passing on of family owned businesses and farms to heirs who continue to run the business, and the charge will not apply to charitable donations. The existing real estate exemption of $250,000 per spouse can also be factored in.
It has not been confirmed when the tax will apply, either at death or eventual sale. It’s also unclear if it will apply to lifetime gifts. Surprisingly, at the current time there is no proposal to reduce the current $11.7million estate tax exemption.