Beware! Congress may eliminate the step-up and basis on long-term
capital gains. In this episode, I'm going to answer
the question, "What is the step up in basis on long-term capital gains?"
And how you can preserve it and what is looming over us
based upon government revenuers who want to get rid of the step-up in basis?
So, you're going to learn in this episode a lot of things that you maybe
did not even know about before.
So, my Name is Doug Andrew and I've been a financial strategist and primarily a tax
minimization specialist for more than 46 years. I've helped
many, many thousands of clients avoid paying unnecessary tax. Well, that's
true as it relates to long-term capital gains.
So, first of all, let's understand the difference between a short-term
and a long-term capital gain. If you hold an asset,
stocks or real estate properties, rental properties or whatever
and you buy them and you hold it for less than a year
at the time of the recording of this video and you sell it for a gain, that is
a short-term capital gain. And those are taxed at your ordinary
income tax bracket rates. Now, sometimes the holding period has been 18 months.
Right now, it's 12. Anything over 12 months or one year,
you qualify for long-term capital gain rates which
are less under the current tax laws under president Donald Trump at the time
of the recording of this video. They may change. Because it seems
like when democrats are in control because they're
tax revenuers, they'd love to have bigger and bigger government and more tax
programs. And so, they like to raise taxes. So, many times, they will get rid
of a capital gains tax rate that is lower and they'll have you pay tax as
ordinary income. Now, if you've watched any other episodes
regarding this I personally feel like capital gain tax
rates are a little bit unfair. Because you're really paying tax
especially on properties real estate on inflation. Most real
estate only appreciates maybe 3 to 4 percent a year. Sometimes a little
bit higher. But that's inflation. You're being taxed
on inflation, the cost of living. And so why are you paying tax when
you're just trying to stay even with or a little bit ahead of
inflation? But government revenuers love to tax
things when they think you're realizing a lump sum of money
because you just say, "Okay, I guess i'll have to pay the tax."
And you give in. They realize it's easier to get money out of you when
you're realizing some money from the sell of something.
So, that's what a long-term capital gain tax is. Now,
Trump being republican, he believes that it's better to
raise tax revenue by raising the revenue generated in America than gets taxed
even at a lower rate. Because historically, it's been proven if
you raise the revenue that's being taxed, you'll actually end up off times with
greater tax revenue. Whereas democrats they primarily say, "No,
we just want to raise taxes." So, under Trump, the current tax rates for
a single individual, if you make between zero to 40
thousand dollars a year and you sell something and have a
long-term capital gain, you pay a zero to the federal government
in long-term capital gain tax. A married couple, it would be about 80,000.
This is in the year 2020 that Ii'm giving an example. Now, anything
between 80,000 for a married couple up to about a
half a million of income, you pay 15% to the federal government plus 41 out of
50 states has a state income tax. And so, I sold many properties in
2019, 2020. And I've had to pay actually 20%
to the federal government because if you
have an income and your capital gain qualifies as part
of that income, then you have to pay 20% to the federal government
plus another 3.8% for Obamacare because he has a tax on
capital gains to fund his Obamacare package.
So, I've had to pay 23.8% in federal tax on long-term capital
gains. Plus another 5% in my state or
a total of 28.8%. Joe Biden at the time of this recording,
he says, "If I'm elected, I am going to get rid of the step-up and
basis on long-term capital gains. And I'm going to raise the capital
gain tax rate up to ordinary income rates." Now, for a couple making
over $400,000 between the
both spouses, that would be 39.% in the Biden tax thresholds. Trump
lowered that down to 37. Biden wants to raise it up to 39.6. And
raise the capital gain rate from 20 up to nearly 40. That's
doubling. He also wants to get rid of the step-up and basis on long-term capital
gains. It's going to happen sooner or later
because whoever's in power in congress, it sways back and forth this
way. That's why it may behoove you if you
want to sell property, to get the capital gains taxes
over with sooner than later at half the rate. What happens is
you sell a property and unless you buy a like property and roll it over if it's
real estate with the 1031 exchange, you can no longer continue to defer
until you die. But a lot of people, they inherit new headaches when they
sell a rental property let's say and then they have to buy a new one of equal
or greater value in order to defer or postpone paying the
capital gain. But they inherit another headache maybe
and maybe they're tired of being a landlord fixing toilets and
taking out trash and evicting tenants and what have you.
Well, the problem is they get caught in this tax trap, they want to avoid the
long-term capital gain. Well, in retrospect,
many of them realize it would have been better off to pay
the 20% rate and get the taxes over with
than to wait and have to pay double that. But especially Joe Biden for example
wants to get rid of the step-up and basis. Why do people postpone or
defer? Because if you keep deferring or doing 1031 exchanges on real estate
and you die, your children get to inherit it with a step up in basis.
Or if it's stock, your kids get to inherit stock and they don't have to pay
the capital gain on what your parents paid for the stock way
many, many years before perhaps. And so, that's called a step up in basis.
Well, they only have to pay tax on what they sell the stock or the real estate
for over and above what it was worth when they inherited it. If you bought it
for 200,000 and you inherited and it's worth
a million, you don't have to pay the capital gain if you inherit it.
Well, that's called a step up in basis. Beware.
They want to get rid of that so that anytime,
anybody inherits a highly appreciated asset,
they will have to pay the capital gains rate at double
on the entire gain that they inherit, instead of getting a step up in basis.
That's why I'm saying, you may want to rethink your thinking. So,
let me connect the dots here for you. So, many times when I tell people,
"If i were you, I would just bite the bullet and pay the tax."
And they go, "Oh, I don't want to pay the tax." I'm going, "Why not pay 20%
today instead of waiting when you know you're going to have to pay 40%?"
"Oh, but i'll get a step up in basis with my
children inheriting it, right?" I'm going, it doesn't sound like it.
Sounds like the democrats want to do away with the step up in basis
and double the capital gains tax rate. You're stuck.
So, maybe you want to sell and get it over with. So, let's say you have a
million dollar capital gain on a piece of property. You pay 200,000
in capital gain tax. You have a net of 800,000. You wouldn't believe how many
times clients of mine have taken the net of
800,000 after paying the capital gain tax.
They put it into my favorite vehicle which I call the Laser Fund.
And I have many educational videos that talk about The Laser Fund which is a max
funded tax advantage insurance contract where I earn 8 to
10 percent. I've been doing this for more than 25 years
on my index universal life policies. Meaning 800,000 if I'm
earning 10%, that's going to double
to 1,600,000 about every 7 ½ years or so.
And it means that whenever I start taking income,
if I have $1,600,000 and I'm earning
8%, see I can pull out 8% a year tax free which usually
is greater than the rental income they were getting out of
the property and they don't have to be a landlord anymore. Or if they wanted to
start immediate income, they can do that. And
there's ways where you can get a 10% payout
that will last as long as you do without depleting principle.
When people see that, they go, "Wow, maybe it's wise to get the taxes
over and done with sooner than later and reposition it into something that's
management unintensive. And I can go enjoy
life and i get the same cash flow or greater." In fact, when they see it, they go,
'Huh, where have you been?" I go, "I've been here all along."
You had your blinders on thinking owning this real estate and deferring the
capital gain was a smart idea." No. It may be smart for you to bite the
bullet. Pay the tax and reposition it into
something that's going to be more predictable and tax-free
from now on.
So, if this is intriguing you, I would implore you to watch a few of my
other educational videos. Click on this one up here
and search and find out how you can accumulate access and transfer your
money totally income tax-free. And this is where most of my clients
reposition the after-tax money when they pay the capital gain tax and
decide they don't want to be a landlord anymore or deal with the volatile
stock market if it happens to be stocks. So, make sure you do the right thing.
Study and analyze the big picture in the long haul and I want you to come out ahead.