Protect Stepped-Up Basis

President Biden’s American Families Plan calls for the elimination of the stepped-up basis tax provision to raise revenue for government spending. This would be devastating for many members of the cold chain industry.

What is Stepped-Up Basis?

A capital gain is a measure of an asset’s appreciation in value over a period of time. In the usual case, a capital gain is the difference between the amount received when an asset is sold and the asset’s basis, which is the purchase price plus a number of adjustments such as depreciation and the value of improvements. Typically, capital gains are taxed when an asset is sold. Untaxed appreciation could be measured and taxed when the asset or business owner dies and the assets or businesses are transferred to the heirs. However, a longstanding provision of US tax law, in place since the Revenue Act of 1921, is that a capital gains tax is not imposed when assets are transferred at death to an heir. Furthermore, tax law allows the heir to increase their basis in the willed assets to fair market value without paying capital gains tax. This is referred to as a step-up of basis. The basis step-up prevents a potential future capital gains tax on inherited assets by removing from taxable gain the appreciation in the asset’s value that occurred during the decedent’s ownership. If the heir were to sell the asset in the future, then capital gains tax would generally apply to appreciation in the asset’s value from after the bequeathal.

For example, suppose a business was purchased for $1 million and valued at $5 million at the time of the owner’s death. Under current law, there would be no tax on the $4 million appreciation that accrued during the owner’s lifetime. The heirs would take the $5 million value of the business as tax basis – the basis would be “stepped-up” by the $4 million unrecognized capital gain without having to pay tax on that gain. Were the heirs to sell the business in a future year for $7 million, they would owe capital gains tax on just the $2 million in appreciation under their ownership.