Biden’s plan for inherited real estate may impact more people than just the wealthy

biden’s-plan-for-inherited-real-estate-may-impact-more-people-than-just-the-wealthy

President Joe Biden addresses a joint session of Congress on April 28, 2021.

Melina Mara | Reuters

President Joe Biden has unveiled a plan for higher taxes on inherited homes to help fund the $1.8 trillion American Families Plan.

The proposal would tax inherited property gains at death, targeting generational wealth transfers. 

But financial experts say the measure may impact more families than just affluent ones.

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

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Currently, heirs may defer taxes on inherited home gains until they sell the property.

They also secure a so-called “step up in basis,” which adjusts the home’s purchase price generally to the value on the date of death.    

According to the Joint Committee on Taxation, the current law saves taxpayers $41 billion per year.

By comparison, Biden wants to treat home inheritances like a sale, making the heirs pay for gains that occurred before they received the property.  

This change may deliver a bill for capital gains taxes at death.

The proposal includes tax exemptions up to $1 million for single heirs and up to $2.5 million for couples, a White House fact sheet outlined Wednesday.

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

Van Leeuwen said the levy may be a burden for heirs who want to keep the family home but can’t afford the tax bill.  

While the median U.S. home sales price is $347,500, the number of transactions exceeding $1 million is growing. Sales of home worth more than $1 million spiked by 81% from February 2020 to 2021, according to the National Association of Realtors.  

Financial experts say those affected shouldn’t panic. 

“We’ll have to see how the language shakes out,” said Mallon FitzPatrick, CFP, managing director and principal at Robertson Stephens Wealth Management in San Francisco.

Estate-planning strategies

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

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

One popular tactic is gifting a home or vacation property to heirs while living with a so-called qualified personal residence trust. 

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

Increase the cost basis to where it should be. It’s a good thing to do and will have a positive impact if these rules change.

Mallon FitzPatrick

managing director at Robertson Stephens Wealth Management

“It’s a very common strategy amongst people who have second homes that are appreciated and want to make low-cost gifts to kids,” Van Leeuwen said.

Another way to save on taxes is by increasing the home’s basis to reduce profit. 

Homeowners can do that by tacking on the cost of improvements, like a new roof or other property renovations.   

“Increase the cost basis to where it should be,” said FitzPatrick. “It’s a good thing to do and will have a positive impact if these rules change.”

This method may be complex for an inherited property without immaculate records, however.

Other approaches may include a family partnership or limited liability corporation.

“These are definitely advanced techniques but may be a way to keep the property in the family,” said Van Leeuwen.

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