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Apartment Groups Urge Caution on Estate Tax Repeal Say It Will Do More Harm Than Good Because of Capital Gains Tax Change Included
WASHINGTON, DC -- The National Multi Housing Council and National Apartment Association are urging the U.S. Senate to reconsider legislation that would permanently eliminate the estate tax, saying that because of the way the full repeal bill handles capital gains, most taxpayers fare better under the existing law as it will exist in 2009 than under the proposed permanent repeal.
Under the estate tax repeal legislation, thousands of taxpayers who inherit stocks or depreciable property, such as apartment or office buildings, will end up owing capital gains taxes even though the estate tax is gone. Under the 2009 version of the law, however, which retains a modified estate tax but handles capital gains taxation differently, inheritors would owe no taxes on those same assets.
“There is an unquestioned conventional wisdom out there that repealing the estate tax is good for business,” said Jim Arbury, Senior Vice President of Government Affairs for the NMHC/NAA Joint Legislative Program and a Certified Public Accountant. “But that is untrue for thousands of taxpayers. That is because the estate tax repeal bill that passed the U.S. House of Representatives on April 13 not only repeals the estate tax, it also repeals “stepped-up” basis, and stepped-up basis is what determines whether heirs will have to pay capital gains on the properties and stocks they inherit.”
Under current law, when an individual inherits property or a stock, the tax basis of the property is “stepped up” to its market value at the time of the inheritance. That means that if the heirs were to sell it now or later, the amount of capital gains tax due would be based on the gain beyond the market value when the property was inherited. But under the House-passed bill, the tax basis of the property would be the original purchase price paid by the donor.
“In repealing the so-called death tax, by eliminating stepped-up basis, the new law may cause some ‘deadly’ capital gains taxes for unsuspecting heirs, not to mention the headache of trying to determine the original value of the inherited asset,” said Arbury.
“This is a complicated tax issue, which is why it has not received more attention,” noted Arbury. “If it had, there would be a tremendous outcry of opposition to this bill. A very simplified example explains why: Assume you inherit commercial real estate worth $3 million that was originally purchased for $500,000 and has been depreciated down to zero. Under the current stepped-up basis law, if you sell the property, you are taxed on the gain beyond $3 million, or the market price of the property when you inherited it. Under the House-passed bill, you are taxed on the gain beyond $500,000, the original purchase price.”
Instead of fully repealing the estate tax, NMHC/NAA are urging Congress to retain the law as it will exist in 2009. At that time:
1. assets are still stepped up to fair market value at the time of the donor’s death;
2. the first $3.5 million of an estate ($7 million for couples) is excluded from taxation;
3. for assets beyond the $3.5 million exclusion, a maximum 45 percent tax rate is applied to the net fair market value (value minus debt); and
4. heirs may re-depreciate the property granted them using fair market value (stepped-up basis).
“Considering our simplified example above, under the House-passed bill, someone who inherits $3 million worth of property will face a significant capital gains tax bill when they sell it and they will not be able to depreciate the property while they own it,” explained Arbury. “Under the law as it will exist in 2009, the will not owe any tax and they will be able to depreciate the property based on the $3 million market value while they own it.”
“Under the 2009 law, 99 percent of households will be exempt from the estate tax because it will only apply to estates valued at $3.5 million or more ($7 million for couples), and they will be exempt from capital gains taxes because stepped-up basis will still exist,” said Arbury. “However, under full repeal, many of those households will owe capital gains taxes. In other words, the ‘death tax’ may be gone, but the capital gains tax will impose a sizeable tax bill on thousands.”
“Not only will the estate tax repeal end up creating a higher tax bill for thousands of Americans, most of whom have no idea that is the case,” noted Arbury, “it will also create a paperwork nightmare for those families as they try to determine what an inherited asset originally cost the donor.”
“The estate tax repeal train is picking up steam, but a closer examination of the facts show that it will hurt more families than it will help, and that is a good reason to put on the brakes before it is too late,” said Arbury.
NMHC and NAA operate a Joint Legislative Program and represent the nation’s leading firms participating in the multifamily rental housing industry. NMHC/NAA’s combined memberships are engaged in all aspects of the development and operation of apartment communities, including ownership, construction, finance and management. Together, the organizations operate a federal legislative program and provide a unified voice for the private apartment industry. Nearly one-third of Americans rent their housing, and almost 15 percent of all U.S. households live in an apartment home. For more information, contact NMHC at 202/974-2300, e-mail the Council at info@nmhc.org, or visit NMHC’s web site at www.nmhc.org.
Contact: Michael Tucker, 202/974-2360, mtucker@nmhc.org
For Release: April 14, 2005
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