For decades, one way to avoid capital gains has been to wait to distribute the asset until after death when the asset acquires a new fair market value, calculated as of the date of death of the transferor or his/her trust or estate. This increase in value is called a step-up in basis. That strategy is at risk under Biden’s proposal and Van Hollen’s “STEP Act.”
Van Hollen calls the step-up in basis “a loophole,” despite the fact that this practice has been legally recognized for decades. While allowing for a $1 million exclusion from taxation, the STEP Act otherwise will tax gifts, transfers to non-grantor trusts, and distributions at death. So, assets that once received the step-up in basis would be taxed on the difference between the fair market value on the date of death and the original purchase price plus, in the case of real estate, the verified cost of any improvements to the asset.
For some, this may mean taxes on hundreds of thousands of dollars, even millions. Further, unlike the other proposals, Van Hollen wants to make this law retroactive to January 1, 2021.
While it is uncertain whether anyone on Capitol Hill would vote to make this retroactive, it is important to bear this possibility in mind when transferring any assets this year.