Should Inherited Property Be Taxable at the Owner's Death?

President Joe Biden has released more detailed information about various facets of his ambitious tax plan. Under current rules, taxpayers who inherit property benefit from a step-up in basis at the time of the original owner’s death — meaning that the basis of inherited assets is “stepped up” to the fair market value of the property on the date of the owner’s death. Biden’s original tax plan proposed repealing the basis step-up going forward.

In a surprise twist, however, Biden’s plan would not only repeal the stepped-up basis, but taxpayers who inherit property would be required to recognize gain at the time of death. In other words, inheriting property that had appreciated would be a taxable event even if the individual does not immediately sell the inherited property. 

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about this new twist on the proposal to repeal the stepped-up basis rules.

Below is a summary of the debate that ensued between the two professors.

Bloink: Repealing the stepped-up basis rules is only the first step toward requiring wealthy Americans to pay their fair share on asset transfers. The richest Americans can avoid any tax liability even with the repeal — simply by hanging on to the assets and hoping for a more favorable future tax regime. Requiring these taxpayers to recognize gain once they actually receive the asset, regardless of whether they sell, ensures that taxpayers are paying at least a portion of their fair tax liability based on overall wealth. 

Byrnes: Requiring all beneficiaries to immediately recognize gain on asset transfers at death is completely unworkable — and patently unfair. It creates a system of double taxation, something that our tax code generally doesn’t tolerate. Assuming the deceased person’s estate is subject to the estate tax, which Biden also plans to increase, the property could be immediately subject to both the estate tax and income or capital gains tax

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