Sell Inherited Property ASAP To Avoid Capital Gains Tax - YouTube

Sell inherited property as soon as possible if you want to avoid a capital

gains tax. In this episode, I'm going to address the

question "How to avoid paying capital gains tax on inherited

property." And get ready because you're going to

learn some things that maybe you didn't

understand.

So, I'm Doug Andrew. I've been a financial

strategist and retirement planning specialist for

more than 46 years. And I've helped many, many thousands of

clients during 4 ½ decades pay the least amount of income tax and

also capital gains tax on highly appreciated

assets when they sell them. So, in this episode, I'm going

to share with you the current law when I'm recording this

which is fall of the year 2020. And I'm going to

put some caveats because a lot of times government revenuers... And this is an

election year when I'm recording this. This is Trump and Biden. Biden has

already announced if he becomes president, he will change the capital

gains tax rate and do away with a step up in basis because he needs

to raise about 800 billion dollars for one of his health care initiatives.

And so, the laws can change. And so, in this

episode, I'm going to talk about what the law is now.

And also, what it could change to become because of proposals that are being made

by in particular the democrat party. In order to raise tax revenue. So, under

the law as it exists in the year 2020 is similar to what it's been for many

many different periods of time. Since income tax

and federal tax was instigated clear back in 1913.

And so, currently, the beauty of having an asset that appreciates over time

and then when you sell that asset, it triggers a capital gains tax. Now,

you need to know from the outset, I've never thought the capital gains tax is

fair. But that has nothing to do I guess with

what the government decides to do. Because

you're paying tax on inflation a lot of the time.

In other words, as you buy a piece of property and if it appreciates

at 3-4 percent a year, that's basically the inflation

rate many times. And so, you're having to pay tax

on what things inflated the cost of living went up.

So, I don't think capital gains tax is really a fair tax.

But it's a time when people get a lump sum usually from selling an asset and

that's when the government, government revenuers want to come in

swoop in and take their share of whatever profit. If there's

money going across the table. The capital gains tax has

fluctuated through the years based upon who's in congress and who's in the

executive branch between being taxed at the ordinary

income tax rate. Normally just income tax rates.

Or whether it's a reduced rate. Now, as I'm recording this, the trump tax

cuts have sheltered capital gains to where if you

make less than a certain amount of income, you don't pay any capital gains

tax. But you need to be aware that the

capital gains that you realize are calculated into your income to

determine what the capital gains tax rate is. And

so, you can go from zero and then it jumps to 15% and then

it jumps to 20% if you make a certain amount of income.

Now, because of the Obama administration passing what was called Obamacare, in

order to fund that proposal and they've been adding

another 3.8% on top of the 20% for the the health care initiative

called Obamacare. Now, that's the federal rate. Now, 41 out of 50 states has an

income tax. And many of those same states will

then charge you a capital gain tax also at their state rate. Maybe 5%

or what have you. So, I have sold some property in the last

2 years. And I've actually paid because of my income 23.8%

in capital gains tax to the federal government and another 5%

to the state where I live. And so when you add all that up,

it's 28.8%. And so, this is a significant amount. But if they go back

to the ordinary income tax rate which is

what Joe Biden has proposed he wants to do, he wants to

move that back up to the 39.6%. So from

basically 20% up to 39.6%. Plus I'm sure they'll add the 3.8 on top

of that for the Obamacare. That would almost double

the capital gains tax rate. But not only that. He wants to do away with the

step-up and basis on long-term capital gains which comes back full circle

to my answer to this question --How to avoid paying capital gain tax on

inherited property? So, let me use an example of

what normally happens when someone inherits a piece of

property or stocks or what have you that have

appreciated through the years. How do they calculate the capital gains

tax on inherited property? Under the current

law, you have a step up in basis. So, let's say

years ago, your parents bought a piece of property maybe a rental duplex

or something for $250,000. And now it's worth a million.

Well, when you purchased that at $250,000, maybe 50,000 of it was the land and the

other 200,000 was the building. Most people who own rental properties

for example will depreciate it down over 27 years or

sometimes under certain tax law, you can accelerate that.

But a lot of times, there's been enough time go by

the property was depreciated down to the value of the land.

So now, that's called your basis. Your basis isn't what you originally

paid for it. If you buy stock, that's your basis. But your basis in real estate

is what you paid for it less the depreciation.

So, in this example, I just used it would be down to 50,000 as the basis, not 250,000

because you've been getting the tax write-offs. And so, what happens is people

usually they sell a property and they're going to have to pay a capital gain

tax. Unless they roll that into a new-like property, that's called

section 1031 of the internal revenue code. So, regardless of whether that

property was held for a long time or people sold it and bought another like

property again and again, that's called a 1031

exchange, the basis remains at that original

amount. So, what happens is that when you go to

sell it, you calculate that entire gain. Let's say

you sold this property for a million dollars that i just talked about

and the basis is down to 50,000. You have to pay a capital gain

tax on the 950,000 of gain. Now, the only way to avoid

it is to either keep rolling it over into new property or

when someone passes away, the children, the heirs inherit that property.

Let's say this million dollar property. They get a step up in basis. Now, they

only have to pay capital gain tax on what they will sell it

for down the road if they wait on what it uh

sells for over and above the step up to 1 million.

So, they didn't have to pay a capital gain tax. That's been the beauty behind

hanging on to properties until someone passes away.

You inherit the new property and you get a step up in basis.

Or if you gift it to a charity like a church or the red cross or the boy

scouts or whatever, they get a step up in basis. Now, what

Biden is proposing that the capital gains rate goes up to

nearly 40%, but also get rid of the step up

and basis on long-term capital gains. And that means

anybody that inherits property is going to have to pay tax when they sell it.

So, my advice may be well keep postponing. Are you really saving by postponing?

I sometimes think it's better to bite the bullet and get the taxes over and

done with. And maybe reposition that money into something that's going to

be a better investment. Many times that's the case.

But if you want to avoid a capital gain tax,

which is the question in this video and you inherit it,

under current law, if you get a step up in basis,

sell it as soon as possible. Because you won't have to pay a capital gains tax.

If you sell it, then you take that money and

you can put it into new property or a different investment and maybe get a

better rate of return. So, the key takeaway

from this is if the simple question is "How to avoid capital gain tax on

inherited property?" Under current law when i'm recording

this, I would say, "As soon as possible" because

you get the step up in basis. If they have done away with a step up in

basis at the time that you're viewing this

episode, then you could continue to postpone and

delay until you realize again. But they may even change the laws to

where when you inherit the property. You must pay a capital gain tax to

inherit it and that forces many people to then

have to sell the asset if you don't have the cash.

I'm a proponent of You know what? Take advantage and

sell it and pay whatever tax you need to pay

and then reposition that money into something that's going to be maybe a

better investment that will be tax free from that point

forward. So, I would implore you to watch other

episodes about capital gains tax on this channel, 3-Dimensional Wealth. You'll

gain insights into opportunities maybe you didn't know existed before and you

will probably learn about where I have told many of my clients

once they sell their property and they avoid the capital gain tax or

they pay the lowest amount possible, where I suggest they reposition that net

after tax money to have it compound and grow tax free

from now on. So, if you have questions, be sure and type in your

question or comment below. And I can record a YouTube that will go

deeper into an area that maybe you need clarification on. But

watch this episode to learn a little bit more about

these topics.

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