Biden’s Inherited Real Estate Plan can affect more people than just the rich

President Joe Biden speaks ahead of a joint congressional session on April 28, 2021.

Melina Mara | Reuters

President Joe Biden unveiled a plan to raise taxes on inherited homes to help fund the $ 1.8 trillion plan for American families.

The proposal would tax inherited capital gains at death and aim for generational wealth transfers.

However, financial experts say the measure could affect more families than just the wealthy.

“I think it could become a swamp from different angles,” said certified financial planner Ken Van Leeuwen, founder and director of Van Leeuwen & Company in Princeton, New Jersey.

More from Personal Finance:
Workers could get 12 weeks of paid vacation under Biden’s plan
Selling Assets to Avoid Higher Capital Gains Tax? You can trigger another tax
The Fed keeps rates close to zero – this is how you can take advantage of it

Currently, heirs can defer taxes on inherited home profits until they sell the property.

You also secure a so-called “step-in basis”, which generally adjusts the purchase price of the home to the value at the time of death.

The current law saves taxpayers $ 41 billion a year, according to the Joint Tax Committee.

By comparison, Biden wants to treat inheritance like a sale, letting the heirs pay for profits made prior to receiving the property.

This change can provide an invoice for capital gains taxes on death.

The proposal includes tax exemptions of up to $ 1 million for individual heirs and up to $ 2.5 million for couples.

For example, let’s say someone inherits a $ 1.5 million family home that was purchased for $ 300,000. That person can owe capital gains taxes on $ 200,000 of the $ 1.2 million profit.

Van Leeuwen said the levy could be a burden for heirs who want to keep the family home but cannot afford the tax bill.

While the median home sales price in the US is $ 347,500, the number of transactions is growing above $ 1 million. According to the National Association of Realtors, home sales valued at more than $ 1 million increased 81% from February 2020 to 2021.

Financial experts say those affected shouldn’t panic.

“We need to see the language change,” said Mallon FitzPatrick, CFP, executive director and director of Robertson Stephens Wealth Management in San Francisco.

Estate planning strategies

While Biden’s plan can have a significant impact, there are ways to minimize the bill.

Van Leeuwen recommends starting with a home appraisal and then meeting with an estate planning attorney.

A popular tactic is to gift a home or vacation home to heirs while they live with what is known as a qualified personal residence trust.

This trust removes the value of the home from an estate and allows the original owner to use the property for a specified number of years.

Raise the cost base to where it should be. It is a good thing and it will have a positive impact if these rules change.

Mallon FitzPatrick

Managing Director at Robertson Stephens Wealth Management

“It’s a very common strategy among people with second homes who are valued and want to give inexpensive gifts to children,” said Van Leeuwen.

Another way to save taxes is to increase the home base to reduce profits.

Homeowners can do this by addressing the cost of improvements such as a new roof or other renovation work.

“Raise the cost base to where it should be,” said FitzPatrick. “It’s a good thing and will have a positive effect if these rules change.”

However, this method can be complex for an inherited property with no flawless records.

Other approaches could include a family company or a limited liability company.

“These are definitely advanced techniques, but they can be a way of keeping property in the family,” said Van Leeuwen.

Comments are closed.