Blinders On

This is really becoming a war between those of us who believe in freedom, capitalism and private property rights and those who support big government and communistic philosophies.

This article by Beverly Goodman from TheStreet.com (supposedly a capitalist website) is wrong in its claim that the estate tax is good for everyone, for a number of reasons.

First is the often used defense of the estate tax that it only affects a small minority of Americans. Such an argument is offensive on its surface. It is nothing short of mob rule and blatant discrimination and persecution of a minority. If it's okay to do evil things to the richest two percent of the nation's citizens, why can't we also justify doing nasty and immoral things to other groups of people that make up a small percentage of the overall population?

Ms. Goodman puts far too much focus on one aspect of the recent change in the estate tax law, the change in the carryover basis for heirs.

As I have advised for decades, the biggest tax saving opportunity is to use the swap 'til you drop strategy when investing in certain assets, such as real estate. Instead of selling property and paying Uncle Sam a chunk of the gain, all of the profits can be rolled over into new real estate without any income tax bite. Savvy real estate investors routinely use Section 1031 (aka Starker) exchanges to accomplish this. While we usually call these tax free exchanges, they are actually tax deferred exchanges. This means that if an investor were to sell off replacement property while alive, all of the cumulative gain that had been deferred previously would become taxable.

However, as I often advise, patience has some big tax benefits. The big payoff is that when a person dies (drops), all of his assets are given a tax cost basis for the heirs of their fair market value as of the date of death. This is called a stepped up basis. This literally wipes out all of the capital gains that accumulated during the decedent's lifetime. This applies to all assets, not just real estate.

As Ms. Goodman points out, the new tax law will eliminate the stepped up basis as of 2010 and replace it with the same kind of carryover basis that currently applies to assets transferred as gifts. I agree that this is not a good move in terms of reducing taxes. However, retaining the immoral estate tax just to keep the stepped up basis is very short sighted. In fact, as the current law stands, when the estate tax comes back to life in 2011 with a measly one million dollar exemption per person, the stepped up basis won't also be coming back. Our rulers in DC have to pass another law to reinstate the stepped up basis rule, which is unlikely.

I don't mean to dump on Ms. Goodman; but she is also wrong to say that we should all support the Federal estate tax because some states will probably raise theirs. I discussed that issue a few months ago, where some states are planning to uncouple their estate tax from the Federal system and make it a stand alone tax because they don't believe they can survive without that revenue stream. Even if that happens, the state tax will be smaller than the up to 60% that IRS takes.

KMK

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/20/2002 01:31:00 PM Send this post: