7 ms·

If this is accurate, it finally explains something I've been asking about for years: The loan is paid back after the step-up in basis. That's the loophole. If t

by wmf 2y ago

If this is accurate, it finally explains something I've been asking about for years: The loan is paid back after the step-up in basis. That's the loophole. If the loan was paid back before step-up, the estate would still have to pay capital gains tax.

johngladtj 2y ago
Pro-tip, the step up basis happens after the estate tax, which is much higher than the capital gains tax, and only applies to the top 1%
- wmf 2y ago
  That's what I would assume, but it still seems like loans should be paid back first (which may trigger selling assets which would trigger capital gains tax), then estate tax should be levied on anything left, then step-up in basis. If if works this way, there's no loophole.
bhauer 2y ago
The step-up in cost basis on death is the original sin that underpins the entire debate over unrealized gains. It's disheartening to see so much thought and deliberation going into an obviously toxic idea (taxing unrealized gains) when the obvious solution (removing the cost basis step-up when assets change hands) is being ignored. Inherited wealth is the least earned, so it should be politically palatable to change this. But presumably because such a change would acutely affect the people who make laws in the country specifically, it is never seriously considered.
- rayiner 2y ago
  From what I can tell the idea was to make sure people would have to sell the family farm or house to pay taxes on unrealized gains on inheritance. It makes no sense to apply that to financial assets.
  - AnimalMuppet 2y ago
    No, but be careful where you draw the line. In particular, don't draw it between "real estate" and "financial assets". Real estate can easily be a financial asset. Instead, the trick is to draw it between "family farm" and "billionaire who bought 100,000 acres of prime farmland".
    - ohashi 2y ago
      Seems straight forward enough, put a value cap on it. $10 million? 20 million? Is anyone going to feel bad for the poor soul who can't pay the tax bill on a free 20 million dollar home? We have a limit on gifts and according to this is 13 million. Just make it that. What would be the downside here other than extremely wealthy having to pay some taxes upon death?
      - xboxnolifes 2y ago
        Make inheritance count toward the gift limit. Have the full $13M limit left on your gifting exemptions? You pass down $13M in inheritance tax free.
        Veserv 2y ago
        That is literally already how it works.
      - throwaway22032 2y ago
        It's simple really, many people don't see it as a "free home". It's your home. It's no more free or unfree, earned or unearned than anything else. The home that I grew up in is.. hell, I'd consider it to be "mine" and my siblings more than almost anything else I have.
        ohashi 2y ago
        If that home is over 10, 13 or 20m dollars... you can pay tax on it. If you have siblings, I assume it would be divided between you, so multiply value by siblings. If you got a home worth that much, you can pay some taxes on it. https://www.mansionglobal.com/articles/more-than-1-500-homes-in-the-u-s-sold-for-10-million-and-up-in-2023-7d59a565 https://www.mansionglobal.com/articles/more-than-1-500-homes... 1,500 homes sold for over 10m in a year. We're talking about the richest of the rich. That's exactly who should be paying some taxes. The people bitching about losing 'their' home this way... are either a) delusional or b) looking for a way to protect their incredible wealth. Is your family home worth more than 10 or 20m dollars?
- pmichaud 2y ago
  Maybe there's just no good solution here, but I think the original inspiration for this sort of law was about family homes. It's one thing to inherit stocks and have to sell some of them off, but it's much more complex to try to pass down a property that can't be arbitrarily subdivided. There are various options obviously, but I think enough people had to sell their beloved childhood home because of the tax obligation that came with the inheritance that someone thought there ought to be a law. Maybe your idea plus a carve out for a primary residence could work, but it doesn't seem politically feasible to me.
  - formerly_proven 2y ago
    > It's one thing to inherit stocks and have to sell some of them off More or less having to do that would be good for society and mildly annoying for the like five dozen existing corporate dynasties on the planet.
  - ashkankiani 2y ago
    Make an exemption for a primary residence. Everything else can go. Stop letting people hoard wealth like dragons.
    - o11c 2y ago
      Is it that common for people to hoard dragons?
      - dllthomas 2y ago
        I have twelve.
      - smsm42 2y ago
        No, you have to be very wealthy to afford one.
    - sangnoir 2y ago
      Without a cap, overpriced 8- or 9-figure residences will themselves become the vehicle of wealth transfer, rather than irrevocable trusts.
- deleted 2y ago
  [deleted]
- deleted 2y ago
  [deleted]
- jongjong 2y ago
  >Inherited wealth is the least earned Let's be real. No wealth is 'earned'. It's almost entirely luck and social connections. No different from inheritance. Besides, inheritance can be hard work, psychologically. Your parents may be in a very different socioeconomic group than you for most of your adult life. Your baseline expectation for a 'normal' lifestyle is somewhat elevated (due to the lifestyle you experienced in your childhood) but, for most of your adult reality, you're broke and you feel guilty knowing that your child (the only one you can afford to have) can't have the same childhood that you had. You work like crazy just to try to earn a living to get back to 'normal' (what you experienced in your childhood) but, deep down, you know you that your best shot at getting there is inheritance in about 30 years' time when you're at death's door (because, with all the stress you experienced, you know you're not going to live as long as your parents). Your biggest worry is that your government will fall to communism and there will be no inheritance. Your life was basically ruined since the start of adulthood as soon as you were confronted with the ugly reality that labor of any kind is worthless and capital is everything. A reality that your parents will never have to face. If the government wants to be perfectly consistent and tax people based on how easy it was for them to earn money, then it should impose wealth tax since the amount of wealth tells you the amount of luck and social connectedness at play... And this will also impact inheritance to some extent, but to a fairer extent.
  - Retric 2y ago
    People can live a long time which can turn relatively modest investments with average returns into significant wealth. 21 to 101 is 80 years and cost dollar averaging kicks in. Sure you could call a long life and decent job luck, but a lot of people live into their 90’s.
    - jongjong 2y ago
      What do you call living to be 90 years old, if not very lucky? Again, luck.
      - Retric 2y ago
        You can do a lot to improve your odds of hitting 90 vs what actuarial tables show. Baseline may only be 15% but a very healthy lifestyle can get close to 50/50 which isn’t some major stroke of luck.
- xmprt 2y ago
  This might be unpopular but I think there are ways that taxing unrealized capital gains could work without being super radical. 1. Allow unrealized losses to be deducted. 2. Once a certain percentage of the gain is taxed, step up the cost basis by the amount of tax paid. That way you avoid double taxation (once under the unrealized value and again when the asset is sold). 3. (optional) Keep the tax rate on unrealized gains low. Even 3% would be significantly higher than what we have today. Under this logic, it almost seems like a no brainer. People who have a ton of wealth in unrealized gains would pay taxes progressively over time instead of being hit with a massive tax bill when they sell (or potentially no tax bill when they die due to the step up in cost basis). Feel free to poke loopholes in this idea.
  - zkelvin 2y ago
    Taxing unrealized capital gains already isn't all that radical -- property tax is effectively a tax on unrealized gains of property value, and essentially every municipality has that tax.
    - ramraj07 2y ago
      Why isn’t every person defending this idea mentioning this fact. It’s so obvious once you mention it.
    - zoklet-enjoyer 2y ago
      Property tax is very unpopular, at least where I live.
    - lokar 2y ago
      Except (sort of) California Also, there is a real debate to be had about if housing should be primary considered an investment or a basic need by society. Many argue that the focus on housing as an investment in the US is a primary driver of our housing problems.
    - loeg 2y ago
      Property tax is a straightforward wealth tax on a certain class of asset, not a tax on appreciation.
- zkelvin 2y ago
  Do you consider municipal property taxes (which, when the property value has risen since purchase, effectively taxes unrealized capital gains) also to be "obviously toxic"?
  - deleted 2y ago
    [deleted]
  - pessimizer 2y ago
    It's a pretty common belief. People having to sell/mortgage their family homes in order to pay higher taxes because their neighborhood is being gentrified is a self-feeding process. If they didn't have to pay taxes until they sold, it would seem far more just.
  - gamepsys 2y ago
    Yes. In regions where real estate prices explode many people are forced out of their homes because they cannot pay the increased tax. This specifically hits senior citizens hard. It's not uncommon for a property to increase it's taxes >30% some years in these boom towns. This creates an economic burden on long term residents, that is mostly used to pay for infrastructure that is needed to accommodate newcomers.
- JackYoustra 2y ago
  It hasn't been ignored, it's been talked about since it got instated and it's never gotten the political traction to be repealed - sustainably! If you don't ensure it's dead, you end up with a corporate tax situation where entities defer taxable events until the law changes. At one point, you have to stop trying the same failed political approach (futile attempts to repeal the stepped-up basis) and try something new.
- hammock 2y ago
  >the obvious solution (removing the cost basis step-up when assets change hands) Not as simple as it sounds...when you can set up original ownership of an asset into a trust and have control of that trust change hands.
  - gruez 2y ago
    moving the funds into the trust would be a taxable event, so I'm not sure what the problem is.
    - hammock 2y ago
      Trust owns the asset from the start. "original ownership"
      - bradleyjg 2y ago
        That’s fine. Impute rent to the trust and have it owe taxes that way. We need the political will, the legal problems are solvable.
- mempko 2y ago
  We already tax unrealized gains. The US has property tax. When you buy a house, you pay a tax based on it's worth. We just don't have a tax on legal fictions (paper property like stock). The question is, why not? Why can't we also tax that property?
- elihu 2y ago
  Another thing that could be fixed if we wanted to ensure that wealthy people actually pay taxes during their lifetime would be to treat taking out a loan using an asset as collateral as effectively the same thing as selling the asset and buying it back at the same price. They then have to pay capital gains.ize Taxing unrealized gains in general I think is impractical since many assets simply don't have well-defined valuations, but if you take out, say, a $10 million loan using, say, shares in a privately traded company, then those shares are apparently worth $10 million dollars because the owner and the bank agreed they were.
w4 2y ago
> The loan is paid back after the step-up in basis. That's the loophole. Presuming you can continue to service your debt payments as interest rates and your income varies over time, and are never subject to a margin call due to a drop in the value of your collateral, something even the most powerful are at risk of: https://www.ft.com/content/cf78d815-7ade-40fc-a68d-ec73accb77c1 https://www.ft.com/content/cf78d815-7ade-40fc-a68d-ec73accb7... It’s not really any different than what the average American family does with their home.
karmajunkie 2y ago
the real problem here (in my opinion at least) is that “borrow” isn’t a realization of gain on the assets. any time illiquid assets are used as collateral that should trigger a taxable event.
profsummergig 2y ago
When I first read about the reset (step-up) in basis after death, I couldn't believe this was the law. Why should inheriting a property reset the basis? What a ridiculous notion. Someone's already getting an asset for free (inheriting it), and we're further subsidizing the tax liability on it. Taxes that were due to the government are wiped out.
- hbrn 2y ago
  AFAIK inflation is one of the reasons. If an asset was worth $50k in 1950, and is now worth $100k, it would feel really weird when capital gains tax is collected on an asset that actually lost more than 80% of it's value over the years.
  - wmf 2y ago
    If an asset is appreciating slower than inflation, that's on you. You should have sold it and put the money in something better.
    - hbrn 2y ago
      First of all, this is a really dumb point. If it is so easy to find good assets, why don't you buy those, take the loan against those like the reddit post suggests, then buy even more assets with those money, take another loan, and just keep doing that to generate infinite amount of money? The only reason stopping you is admitting that every asset carries a risk. But whether it's on you or not is beyond the point. Being taxed on top of a loss is not a good thing. Also there are plenty of reasons not to sell a depreciating asset. For example, CEO willing to maintain control over company, or simply not wanting to send bad signals to the public by selling their shares (because that would depreciate the asset even more). A better argument would be to adjust basis for inflation instead of resetting it.
anonfordays 2y ago
Except that's not a loophole since the estate will be taxed at the step-up basis. If you bought $20M in assets 25 years ago that are now worth $200M, the step-up occurs so you don't pay capital gains, but you still pay federal estate taxes which is roughly 40%. He hand waves it by talking about moving the assets to an irrevocable trust, but that action is a taxable event... The post is a LARP from a reddior.

by wmf 2y ago

johngladtj 2y ago

Pro-tip, the step up basis happens after the estate tax, which is much higher than the capital gains tax, and only applies to the top 1%

wmf 2y ago
That's what I would assume, but it still seems like loans should be paid back first (which may trigger selling assets which would trigger capital gains tax), then estate tax should be levied on anything left, then step-up in basis. If if works this way, there's no loophole.

bhauer 2y ago

The step-up in cost basis on death is the original sin that underpins the entire debate over unrealized gains. It's disheartening to see so much thought and deliberation going into an obviously toxic idea (taxing unrealized gains) when the obvious solution (removing the cost basis step-up when assets change hands) is being ignored. Inherited wealth is the least earned, so it should be politically palatable to change this. But presumably because such a change would acutely affect the people who make laws in the country specifically, it is never seriously considered.

rayiner 2y ago
From what I can tell the idea was to make sure people would have to sell the family farm or house to pay taxes on unrealized gains on inheritance. It makes no sense to apply that to financial assets.
- AnimalMuppet 2y ago
  No, but be careful where you draw the line. In particular, don't draw it between "real estate" and "financial assets". Real estate can easily be a financial asset. Instead, the trick is to draw it between "family farm" and "billionaire who bought 100,000 acres of prime farmland".
  - ohashi 2y ago
    Seems straight forward enough, put a value cap on it. $10 million? 20 million? Is anyone going to feel bad for the poor soul who can't pay the tax bill on a free 20 million dollar home? We have a limit on gifts and according to this is 13 million. Just make it that. What would be the downside here other than extremely wealthy having to pay some taxes upon death?
    - xboxnolifes 2y ago
      Make inheritance count toward the gift limit. Have the full $13M limit left on your gifting exemptions? You pass down $13M in inheritance tax free.
      - Veserv 2y ago
        That is literally already how it works.
    - throwaway22032 2y ago
      It's simple really, many people don't see it as a "free home". It's your home. It's no more free or unfree, earned or unearned than anything else. The home that I grew up in is.. hell, I'd consider it to be "mine" and my siblings more than almost anything else I have.
      - ohashi 2y ago
        If that home is over 10, 13 or 20m dollars... you can pay tax on it. If you have siblings, I assume it would be divided between you, so multiply value by siblings. If you got a home worth that much, you can pay some taxes on it. https://www.mansionglobal.com/articles/more-than-1-500-homes-in-the-u-s-sold-for-10-million-and-up-in-2023-7d59a565 https://www.mansionglobal.com/articles/more-than-1-500-homes... 1,500 homes sold for over 10m in a year. We're talking about the richest of the rich. That's exactly who should be paying some taxes. The people bitching about losing 'their' home this way... are either a) delusional or b) looking for a way to protect their incredible wealth. Is your family home worth more than 10 or 20m dollars?
pmichaud 2y ago
Maybe there's just no good solution here, but I think the original inspiration for this sort of law was about family homes. It's one thing to inherit stocks and have to sell some of them off, but it's much more complex to try to pass down a property that can't be arbitrarily subdivided. There are various options obviously, but I think enough people had to sell their beloved childhood home because of the tax obligation that came with the inheritance that someone thought there ought to be a law. Maybe your idea plus a carve out for a primary residence could work, but it doesn't seem politically feasible to me.
- formerly_proven 2y ago
  > It's one thing to inherit stocks and have to sell some of them off More or less having to do that would be good for society and mildly annoying for the like five dozen existing corporate dynasties on the planet.
- ashkankiani 2y ago
  Make an exemption for a primary residence. Everything else can go. Stop letting people hoard wealth like dragons.
  - o11c 2y ago
    Is it that common for people to hoard dragons?
    - dllthomas 2y ago
      I have twelve.
    - smsm42 2y ago
      No, you have to be very wealthy to afford one.
  - sangnoir 2y ago
    Without a cap, overpriced 8- or 9-figure residences will themselves become the vehicle of wealth transfer, rather than irrevocable trusts.
deleted 2y ago
[deleted]
deleted 2y ago
[deleted]
jongjong 2y ago
>Inherited wealth is the least earned Let's be real. No wealth is 'earned'. It's almost entirely luck and social connections. No different from inheritance. Besides, inheritance can be hard work, psychologically. Your parents may be in a very different socioeconomic group than you for most of your adult life. Your baseline expectation for a 'normal' lifestyle is somewhat elevated (due to the lifestyle you experienced in your childhood) but, for most of your adult reality, you're broke and you feel guilty knowing that your child (the only one you can afford to have) can't have the same childhood that you had. You work like crazy just to try to earn a living to get back to 'normal' (what you experienced in your childhood) but, deep down, you know you that your best shot at getting there is inheritance in about 30 years' time when you're at death's door (because, with all the stress you experienced, you know you're not going to live as long as your parents). Your biggest worry is that your government will fall to communism and there will be no inheritance. Your life was basically ruined since the start of adulthood as soon as you were confronted with the ugly reality that labor of any kind is worthless and capital is everything. A reality that your parents will never have to face. If the government wants to be perfectly consistent and tax people based on how easy it was for them to earn money, then it should impose wealth tax since the amount of wealth tells you the amount of luck and social connectedness at play... And this will also impact inheritance to some extent, but to a fairer extent.
- Retric 2y ago
  People can live a long time which can turn relatively modest investments with average returns into significant wealth. 21 to 101 is 80 years and cost dollar averaging kicks in. Sure you could call a long life and decent job luck, but a lot of people live into their 90’s.
  - jongjong 2y ago
    What do you call living to be 90 years old, if not very lucky? Again, luck.
    - Retric 2y ago
      You can do a lot to improve your odds of hitting 90 vs what actuarial tables show. Baseline may only be 15% but a very healthy lifestyle can get close to 50/50 which isn’t some major stroke of luck.
xmprt 2y ago
This might be unpopular but I think there are ways that taxing unrealized capital gains could work without being super radical. 1. Allow unrealized losses to be deducted. 2. Once a certain percentage of the gain is taxed, step up the cost basis by the amount of tax paid. That way you avoid double taxation (once under the unrealized value and again when the asset is sold). 3. (optional) Keep the tax rate on unrealized gains low. Even 3% would be significantly higher than what we have today. Under this logic, it almost seems like a no brainer. People who have a ton of wealth in unrealized gains would pay taxes progressively over time instead of being hit with a massive tax bill when they sell (or potentially no tax bill when they die due to the step up in cost basis). Feel free to poke loopholes in this idea.
- zkelvin 2y ago
  Taxing unrealized capital gains already isn't all that radical -- property tax is effectively a tax on unrealized gains of property value, and essentially every municipality has that tax.
  - ramraj07 2y ago
    Why isn’t every person defending this idea mentioning this fact. It’s so obvious once you mention it.
  - zoklet-enjoyer 2y ago
    Property tax is very unpopular, at least where I live.
  - lokar 2y ago
    Except (sort of) California Also, there is a real debate to be had about if housing should be primary considered an investment or a basic need by society. Many argue that the focus on housing as an investment in the US is a primary driver of our housing problems.
  - loeg 2y ago
    Property tax is a straightforward wealth tax on a certain class of asset, not a tax on appreciation.
zkelvin 2y ago
Do you consider municipal property taxes (which, when the property value has risen since purchase, effectively taxes unrealized capital gains) also to be "obviously toxic"?
- deleted 2y ago
  [deleted]
- pessimizer 2y ago
  It's a pretty common belief. People having to sell/mortgage their family homes in order to pay higher taxes because their neighborhood is being gentrified is a self-feeding process. If they didn't have to pay taxes until they sold, it would seem far more just.
- gamepsys 2y ago
  Yes. In regions where real estate prices explode many people are forced out of their homes because they cannot pay the increased tax. This specifically hits senior citizens hard. It's not uncommon for a property to increase it's taxes >30% some years in these boom towns. This creates an economic burden on long term residents, that is mostly used to pay for infrastructure that is needed to accommodate newcomers.
JackYoustra 2y ago
It hasn't been ignored, it's been talked about since it got instated and it's never gotten the political traction to be repealed - sustainably! If you don't ensure it's dead, you end up with a corporate tax situation where entities defer taxable events until the law changes. At one point, you have to stop trying the same failed political approach (futile attempts to repeal the stepped-up basis) and try something new.
hammock 2y ago
>the obvious solution (removing the cost basis step-up when assets change hands) Not as simple as it sounds...when you can set up original ownership of an asset into a trust and have control of that trust change hands.
- gruez 2y ago
  moving the funds into the trust would be a taxable event, so I'm not sure what the problem is.
  - hammock 2y ago
    Trust owns the asset from the start. "original ownership"
    - bradleyjg 2y ago
      That’s fine. Impute rent to the trust and have it owe taxes that way. We need the political will, the legal problems are solvable.
mempko 2y ago
We already tax unrealized gains. The US has property tax. When you buy a house, you pay a tax based on it's worth. We just don't have a tax on legal fictions (paper property like stock). The question is, why not? Why can't we also tax that property?
elihu 2y ago
Another thing that could be fixed if we wanted to ensure that wealthy people actually pay taxes during their lifetime would be to treat taking out a loan using an asset as collateral as effectively the same thing as selling the asset and buying it back at the same price. They then have to pay capital gains.ize Taxing unrealized gains in general I think is impractical since many assets simply don't have well-defined valuations, but if you take out, say, a $10 million loan using, say, shares in a privately traded company, then those shares are apparently worth $10 million dollars because the owner and the bank agreed they were.

w4 2y ago

> The loan is paid back after the step-up in basis. That's the loophole. Presuming you can continue to service your debt payments as interest rates and your income varies over time, and are never subject to a margin call due to a drop in the value of your collateral, something even the most powerful are at risk of: https://www.ft.com/content/cf78d815-7ade-40fc-a68d-ec73accb77c1 https://www.ft.com/content/cf78d815-7ade-40fc-a68d-ec73accb7... It’s not really any different than what the average American family does with their home.

karmajunkie 2y ago

the real problem here (in my opinion at least) is that “borrow” isn’t a realization of gain on the assets. any time illiquid assets are used as collateral that should trigger a taxable event.

profsummergig 2y ago

When I first read about the reset (step-up) in basis after death, I couldn't believe this was the law. Why should inheriting a property reset the basis? What a ridiculous notion. Someone's already getting an asset for free (inheriting it), and we're further subsidizing the tax liability on it. Taxes that were due to the government are wiped out.

hbrn 2y ago
AFAIK inflation is one of the reasons. If an asset was worth $50k in 1950, and is now worth $100k, it would feel really weird when capital gains tax is collected on an asset that actually lost more than 80% of it's value over the years.
- wmf 2y ago
  If an asset is appreciating slower than inflation, that's on you. You should have sold it and put the money in something better.
  - hbrn 2y ago
    First of all, this is a really dumb point. If it is so easy to find good assets, why don't you buy those, take the loan against those like the reddit post suggests, then buy even more assets with those money, take another loan, and just keep doing that to generate infinite amount of money? The only reason stopping you is admitting that every asset carries a risk. But whether it's on you or not is beyond the point. Being taxed on top of a loss is not a good thing. Also there are plenty of reasons not to sell a depreciating asset. For example, CEO willing to maintain control over company, or simply not wanting to send bad signals to the public by selling their shares (because that would depreciate the asset even more). A better argument would be to adjust basis for inflation instead of resetting it.

anonfordays 2y ago

Except that's not a loophole since the estate will be taxed at the step-up basis. If you bought $20M in assets 25 years ago that are now worth $200M, the step-up occurs so you don't pay capital gains, but you still pay federal estate taxes which is roughly 40%. He hand waves it by talking about moving the assets to an irrevocable trust, but that action is a taxable event... The post is a LARP from a reddior.