Proposed Capital Gains Tax Increase Consequences for Property Heirs

Here’s the next podcast in the Legislative Changes in Real Estate series!

Marica and I talk about the effects that the proposed legislation would have on property heirs.

René Nelson, Eugene commercial real estate broker
Marcia Edwards, Eugene residential real estate broker

Legislative Changes in Real Estate – Part 3

Marcia Edwards: Well, René, we’ve been talking about the impact of some legislation federally that’s coming down the pike in regards to capital gains. It sounds like the Biden administration intends to put into legislation, by the end of this year, a 40% capital gains tax, which was previously 20%. Is that right?

René Nelson: Yeah, the anticipation is that they’re going to try to pass that by the end of the year, so December 31st, it will become law January 1st. And again, they’re still mulling it over and deciding where the limit is. President Biden basically said that it would be anything that sold at 500,000 or over.

Now, here’s an interesting strategy that I see, Marcia, most people that own investment property and who have been building a portfolio, always think, “Well, I’m just going to keep what I have, and I’ll pass away and it’ll pass on to my kids or my heirs, and then they’ll get the stepped up basis.” Meaning it goes to the new value and that’s what the kids take the value at, and they don’t have to pay tax on that.

René Nelson: But that law is also on the chopping block, and President Biden is basically now going to say, that if it passes to the heirs, the new proposed change, it would cut off at a million dollars, $2.5 million for a married couple. But if you have a portfolio worth more than $1 million, and you pass away and that goes to your kids, they’re going to have a tax consequence.

So let’s say that you bought a property for $100,000 years ago, and now you pass away and it’s worth a million dollars, well, there’s a $900,000 profit on that, so your heirs are going to owe $360,000 within nine months of your death. And I know nine months sounds like a lot, but I deal with estates and I see where it… It just takes a while to get all that settled. So my concern for our nation and for our listeners, is it’s going to force the kids, it’s going to force your heirs to sell the real estate, because not everybody is going to be able to come up with $360,000 in cash.

Marcia Edwards: Right, exactly. Especially in that circumstance. So what you’re looking towards is foresight, you’ve got to take a look at this and face the fact that it’s very real, and create some urgency in your own portfolio to get right sized within these time frames.

René is available to answer your real estate investment questions. Schedule a 15-minute discovery call to better understand your investments and the market today.