If there are no records, why not make the basis 0?
If there is real money involved, someone will track down the records.
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Well thatâs an argument against the estate tax. The step-up in basis only comes into play when the farm is sold.
If grandpa is so rich that he forgot he had this valuable stock, the kids are inheriting plenty of assets he remembered that he had.
Again the âburdenâ on the heirs is that they may have to pay an extra capital gains tax which amounts to a few percent of this particular asset. I canât see using that as an excuse to wipe out 100% of capital gains taxes on all the assets that rich people hold onto until death. The proposed cure is vastly out of proportion to the harm.
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Eh it might have been all of 1 or 2 shares back when he acquired it.
Nowadays with fractional shares it might not even be that much.
Yeah, I can see only giving a step-up on, say, the first $500,000 you inherit.
That covers like 99% of the bookkeeping issues and the rich probably keep better records anyway.
Letâs just do it like parking lots. If you lost your ticket, then maximum charge.
Now you can curse at your dead grandpa for not keeping good records.
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From personal experience, Iâve seen the difficulty of keeping records. I have Vanguard mutual funds that Iâve acquired at various times over 50 years. Maybe for 20 years I kept good records. Now, forget it. Fortunately Vanguard does tell me the basis of them. For shares bought since 2010 or thereabouts (as Twig said), they must keep records. In some funds that is well under half my shares. Fortunately Vanguard also tells me the basis of the earlier shares (ânon covered sharesâ). The IRS is does not have to accept that, but so far they have.
A different issue, that could apply to both me and my wife, is that we each made some after-tax contributions to IRAs. For many years I kept good records, but I think the last such contribution was in the 1980âs, and I no longer have them or the tax returns from those years (which would show what I filed with my taxes). I have used Turbotax every year, and Turbotax has a record of the basis (though not the source of the basis). Iâve reached the point of taking distributions, so I have 2 recent tax returns claiming my basis, which so far the IRS hasnât challenged. My wife will take a distribution next year, so that return will show the basis. The IRS might or might not accept it. (For both of us, the basis is small. Under 1% for me. Perhaps 3,000 for her, of a much smaller IRA)
Proper record keeping can be such a burden.
We needed (i.e. per the tax law had to, might or might not have been caught for noncompliance, which I didnât consider) to report the gain on some property my mother sold a few years ago. She had inherited it from her father, and the property was divided 7 ways at that time. Even with the step up in basis, we could only estimate it. (two lawyers are my siblings or inlaws, and we discussed the process with them and some of the owners of the other properties.) Best anyone could suggest was an estimate. I think we came up with a reasonable estimate, which was not challenged by the IRS.
(âWe needed toâ = âmy mother needed toâ, but sheâs over 90 and I do her tax returns. And I have asked Twig for advice at times on those tax returns, which has been extremely helpful.)
That argument comes up with estate taxes. Okay, we can sell a portion of the stock portfolio to pay estate taxes, but we canât sell a portion of the farm or the restaurant.
Estate tax laws already have special rules for family owned businesses (including farms) that allow people to spread the tax an pay it out of future profits.
If we really got rid of step up, AND required paying the accrued capital gains tax at death, Iâd support applying those rules we already have for estate taxes to the capital gains tax.
Simplest solution is to just get rid of capital gains tax (as if that could ever happen).
I have been tracking land prices on our family farm since capital gains tax was introduced in Canada in 1971: farm has to be revalued every time the ownership changes. The capital gains exemptions on passing it to my children or grandchildren changed some years ago and now do not apply in our case so my heirs are going to pay a whack of capital gains tax after my wife and I die as farmland has appreciated incredibly since my mother gifted it to us years ago.
If Iâm understanding this correctly, your grandfather bought the land, your mother inherited it, got the step-up, then later sold it. When she sold it, she had to estimate the market price when she inherited it. Due to step-up, there was not transaction at the time and hence you didnât have a solid number.
Now imagine we get rid of the step-up. She would have had capital gains tax when your grandfather died. At that time, the basis was his original purchase price. There would have been a hard record for that. Later, when your mother died, youâd have the record of her tax transaction (assuming she didnât sell the property).
It seems to me that the step-up created the difficulty of establishing a price where there was no transaction.
These are a mess nearly every time Iâve encountered them. But if the IRS isnât challenging what youâve been reporting then you should be fine to go with those numbers.
It is âsuch a burdenâ because it is such a small amount of money. The tax implications are small. For your children the tax differential is a small portion of a windfall they never earned.
Presumably, youâve written a will, you donât want to burden your children with the extra effort of settling your affairs without one. You will also leave them some financial records so they can find your assets. You will leave them what you have available for basis.
As I point out to Twig, the current lawâs solution â wiping out all the capital gains taxes that accrued during everyoneâs lifetime, is far out of proportion to the loss on that unearned windfall.
Itâs not proposed⌠itâs current policy.
So again, weâre talking about a trivial amount of tax. Just pay the extra few bucks and be happy you inherited something and didnât have to pay grandpaâs nursing home bills before he died.
But my wife hasnât reported any IRA activity since 1986 or so. But it will not be a disaster if they conclude her basis is 0.
Thanks, thatâs kind of where Iâm going. If youâre rich, you should have good records or your heirs are already inheriting plenty.
You and I may draw different lines for ârichâ. Note that the issue here is not total net worth at death, but total in assets that might be subject to capital gains taxes. Iâd apply the deductible to the second number.
Correct, I edited the comment.
And, after they pay those taxes, they will have an even bigger whack of a windfall. Most people never get that.
Iâm going to disagree strongly here. Most of people go out, work hard, and provide something of value to others in exchange for their pay. Then, they pay taxes on that earned income.
Capital gains on undeveloped land are completely unearned by the owner. Henry George was right, if weâre looking for something to tax, gains on land are the most obvious target.
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Pretty close (and very consistent with what I said. Actually first her mother inherited it from her father, to my motherâs basis was at the time of her motherâs death).
That doesnât mean the step-up was the only cause of the difficulty. Maybe in your state sale records are back all the way. In that state (Alabama) maybe, maybe not. This was a farming property, and there may have been some in-family, no sale, splitting of the property along the way. And actually the property was first acquired (I think) by my great-grandfather (possibly earlier) and I donât know that what my grandfather got was all of what was originally purchased, or whether the parcel my mother got was all of what my grandfather owned. (What she got was a 1/7 interest in a parcel, not specific land carved out of that parcel, but all of that history would become critical if we had to go back to some original sale.)
Given how long ago it came into the family, if there had never been a step-up and the current basis was 0, close enough for actuarial work, if not as anal as some actuaries including me would be with personal finances.
Of course you are right. Sometimes I get greedy.
The tax payable on my farmland will only amount to 25% as only 50% of capital gains are taxable. I may well donate the non-arable part of it to a conservation trust as I want that part to be preserved forever for wildlife. That would further reduce the tax.
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