Beware. Democrats want to eliminate step up in basis. In this episode,
I'm going to address the question "What is
the step up in basis on long-term capital gains?" Because i fear sooner or
later it's going to go away especially if democrats get their way in
order to raise tax revenue to fund some of their
initiatives. So, put on your seat belt. I'm going to
show you how important it is to understand this
especially if you might inherit some assets from
your parents.
So, I'm Doug Andrew. I've been a financial strategist,
a tax minimization specialist now for more than 46 years.
I've written uh 11 books so far. And I have a goal to write a book every
year the rest of my life. If you stay with me, I'm going to show
you how you can get a free copy of my most recent best-selling book The Laser
Fund, 300 pages. I'll gift you a copy of that book.
But let's cover what a step up in basis is and then i'm going to show you how
impactful this will be if they do away with what is called a
step up in basis on long-term capital gains.
So, I'm going to go over here to the white board and
give you a few examples here. This could relate to
real estate, rental properties, commercial buildings.
It can also relate to stocks. So, let's say
that your parents purchased some investments whether it's stocks or real
estate. Their purchase price let's say it was 250,000.
10 years, 15, 20, 30 years ago, 50 years ago. See, that's what you put into the
investment. That's called your basis. Many times, if you buy a piece of
property and you end up paying this amount for
the property, but let's say that at the time you did
it, only 40 or 50 thousand was the actual land. The rest of it
was the building, okay? Well, you can depreciate down the
building. And so, that gets rid of some of the basis. It means
that you are depreciating that. It's a tax
write-off which is actually pretty good if you own rental properties. There's
3 big deductions you can take. The depreciation
on the property over you know 20 to 30 years.
You're depreciating it down just to the value of the land. But then you have also
any mortgage interest. That's deductible. But then also maintenance and repairs.
The combination of those 3 deductions means usually you have a loss
that carries forward and helps you with tax benefits on your tax return.
Well, those are all recouped when you sell it.
Because let's say the 250,000 property goes up in value to 1 million. Now,
this is really realistic because in real estate, if real estate
appreciates it 5% a year, it's going to double every 15 years. If
it appreciates it 7%, which many areas do, it's going
to double every 10 years. So, in 10 years, it
doubles to 500,000 and in another 10 years, at the end
of 20 years, it's worth a million. This happens on people's personal
residences. Now, sometimes I have my son's in-laws,
they bought a home for 230,000 in the San Francisco bay area
years ago and they raised their 6 children there. And
you can add to the basis because of improvements
or additions. But you know that about 30 35 years later, they sold
that for 4.6 million dollars. Now,
that's called a long-term capital gain. In a nutshell, you do get some
exemptions or you can have up to 500,000 if you're married of capital gains every
time you sell a house or if your single is 250,000.
But let's talk about non-owner occupied rental income real estate
or stocks or anything like that. See, that's called the
the gain. That's called a long-term capital gain if you've
had that property for more than a year. Now, depending upon who's in office
in the executive branch and also congress, you can sort of tell who
likes to have the highest taxes. And so, usually when republicans are in
control, the capital gain tax rates are around 15
to 20 percent. At the time of the recording of this,
the capital gain from a federal level is 20%.
When Obama was in office, to fund his Obamacare
as it was called, okay? There was an extra 3.6 or whatever. And so,
many times you have another 3 point (let's say) 6 percent on top of that.
And so, 23-24 percent is the federal rate. Now, most states
have also a long-term capital gain rate. It could be 5%
or more what have you. So, you're paying tax on
your property simply appreciating in value. I think it's an unfair tax frankly
because you're paying tax for inflation. Because
sometimes that's going to happen regardless and
it's just inflation but you're having to pay
tax on what the inflation rate was. I think that's sort of unfair.
But the government, they're hard up for tax revenue, right?
Well, sometimes when we have the democrats in control
in the presidency or in congress, they want to change the capital gain
tax rate, long-term capital gain to the ordinary income rate, the regular income
tax rate. At the recording of this right now, under the trump tax cuts, the
highest is 37% for federal income tax. When those trump
tax cuts expire or change, it will go back up to
the 39.6 federal rate. Okay. Now, in an election year you will
hear the delegates. You'll hear the candidates
for president talk about what they plan to
do. And Joe Biden with the democrat party, he
wants to even do more spending with health care
and he says it's going to cost 750 billion extra dollars. And of course what
what do they ask him? "Where you're going to get the money Mr.
Biden?" And he disclosed. He's going to take the federal
tax rate on long-term capital gains from this to this. Now,
20 up to nearly 40 is double. But he said, "I'm also going to get rid of the step up
and basis." So, what's the step up in basis and how
does this affect you? So, people don't like to pay unnecessary
tax any sooner than they need to. And frankly, I agree.
So, most people like to postpone or delay the inevitable paying
capital gains tax so they hang on to the asset.
If it stocks, they just hang on to the stock. If it's real estate, they either
hang on to it to avoid paying a capital gain tax
or they do a 1031 exchange. In real estate, that simply means, "If I
sell a rental property, a piece of real estate and I have a gain
now..." Because the basis was 250 and I've depreciated
it down. And I'm selling it for a million or like
these people. 230, 4.6 million. Instead of having to pay
a capital gain tax even here at 20 23 plus the state rate, people pay as
much as 30%. My heavens, they'll be paying as much as
50% when you add the state capital gain rate on top of this.
If Joe Biden were to get his way to do this, okay?
And so, what happens is they don't want to pay that tax because
it's 30, 40 percent of their money. So, they do a 1031 exchange. They sell
their property, they cannot touch the money. It has to go to
a third party in escrow. And then they buy
a like property. And if they qualify, then the capital gain continues to defer.
You're doing a 1031 exchange. The money goes into
the new property. And as you do that, you continue
to defer having to pay a capital gain tax. Now, why do people do that?
Frankly, sometimes they wish they hadn't done it because it's like going from the
frying pan to the fire or they're just trading
the last headache for a new headache. Because they still have to be a landlord
evicting tenants, taking out trash, fixing toilet. And it's amazing how many people
don't go, "Why don't i just buy bite the bullet and
pay this?" And take the net and put it into a
portfolio of my favorite financial instruments, I call it The
LASER Fund, max funded tax advantaged indexed
universal life insurance contracts. And people are like shocked. They're
getting 7 to 10 percent tax free cash flow
that every million generate 70 to 100 thousand a year of tax free
income which is as good or better than their real
estate was doing. And they go, "Wait a minute.
I don't have to fix toilets, evict tenants take out trash anymore?"
What am i going to do with my time? Go enjoy life. You don't have to be a
landlord and you can get those same rates of return.
But some people go, "I don't want to pay the tax." So, they
defer it because the law says that whatever it's worth down the road,
if you die and you leave
that to your children, they get a step up in basis.
If you give it to a charity, the charity gets a step up in basis.
Meaning, if it's worth 4.6 million when you die and leave it to your kids,
they don't have to pay the capital gain. Now, the basis goes up. It's stepped up to
4.6 million. The children only have to pay capital gain tax on
what they sell it for when they sell it over and above
this, not this. Democrats say, "Let's get rid of that." That when you
die, you will pay... The heirs or if you're alive, you will
pay tax on the full gain. You don't get a step up in
basis. And it won't be at this rate. It'll be at
double that. This is where they plan to get tax
revenue. You know what? I think there's a lot of
people that have assets that have appreciated
a lot that they were counting on that step-up and basis.
And they may be tempted to make an appointment with someone like a DR
Kaborkian to hurry and die before that goes into law.
You know how many billions of dollars that's going to cost Americans
to help out these initiatives that frankly
I think we could fund in other ways or that people take ownership in their own
retirement? Hey, if this is even slightly resonating
with you, you want to learn and protect yourself
and do what i alluded to something far better
than maybe thinking, "I'm going to keep postponing and
hopefully get a step up in basis as I transfer and buy new properties or
my kids inherit this." Because it looks like sooner or later it's going
out the window. So, protect yourself. I would love to gift
you a copy of my most recent best-selling book The LASER Fund.
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estate investments or stocks. And so, this is actually 2 books in one.
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options there to listen and learn watch and learn through
videos and audios and so forth. But this will help you learn about these
kinds of tax strategies and how to protect yourself and preserve
what you've worked so hard to accumulate. And the accumulation was primarily a
function of inflation. Why should you pay tax on
inflation? Don't do it.