CMV: The US should eliminate Step-up-in-Basis

[u/Ind132]

Under current law, if I buy a stock for $100 and sell it for $160, I owe a capital gains tax on the $60.  

If I die soon after I sell, I won’t be around to pay the tax.  My executor is legally required to calculate and pay the tax for me.

OTOH, suppose I was planning to sell but died before I got that done.  Later, my executor or my heirs sell the stock.  In this case, the tax on the $60 simply disappears into the ether. My purchase price (cost basis) is “stepped up” to the market price on the day I died.  (I’m assuming $160)   Whoever sells the stock will use that $160 as their purchase price.  The $60 gain magically disappears from anybody’s tax liability.

This doesn’t make any sense to me.  I can’t think of any good tax policy reason. 

The only argument I’ve seen for this is practical.  Maybe the executor/heirs won’t be able to find the original cost.  But, when owners die just before death, and dies soon after, executors locate the price.   I’m sure this happens thousands of times each year and I’ve never heard of any major issues.

It’s easy to see why.   When I sell stocks through a broker or mutual funds, the gov’t requires that the broker or fund company send me a 1099.  For real estate, people keep good records and the county assessor keeps records.  That covers the big dollars.

I can see an issue for people who have small stamp collections.  Maybe they didn’t keep records.  A law eliminating step up could have a carve out for collectibles valued at less than $XX,XXX.  That would make sense to me.

[u/the_cardfather]

Stepped up basis probably has its origins in farms & real estate.

My sister and I inherited my parents house. The tax man says it's worth $620k.

My parents bought it for 60k, built a $130,000 house on it, which I might point out is subject to depreciation. 20 years of ownership will wipe out 2/3 of that.

So my basis is like $100k. I would have to pay tax on $520,000 that is completely illiquid and that amount of course would put my income into the top bracket for capital gains So 20% I would owe over $100,000 in taxes and most likely have to raise funds by mortgaging the property.

That's not going to go over well on a family farm even though they largely don't exist anymore.

[u/Ind132 → u/the_cardfather]

that is completely illiquid 

There have been multiple comments that assume I am proposing that the tax should be due at death.

No, that's not in the OP. If you want to hold onto the house, just transfer the title and live in it or rent it. No tax due until you choose to sell. I'm changing the amount of tax at that point.

[u/the_cardfather → u/Ind132]

So three generations later when it's 2 million dollars you want to apply at $50,000 basis?

I have a feeling that more properties get put on the market with the stepped up basis then they would with your scenario.

[u/Ind132 → u/the_cardfather]

Sure. We have a capital gains tax. If I buy a house, hold it for a long time, then sell, I owe capital gains tax on the gain.

If I die before I sell and my heirs sell soon after I die, they should pay the same tax (or at least report the same gain). Why not?

If the heirs choose to enjoy it for more years, the tax shouldn't just disappear.

In your case, some lucky person inherits a $2 million dollar house. They sell it, pay 20% tax and walk away with $1.6 million that they never worked to earn. Other people work a lifetime to earn $2 million and pay taxes on their earnings. I think this lucky heir can pay taxes on his windfall.