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stepped up basis, how to plan for taking advantage

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rated:
So the stepped up basis rule is simple in concept, when you pass away, your assets goto your heirs. When they goto sell, their capital gain is based on value at time of your passing, not of when you originally acquired them, thus paying significantly less capital gains. For businesses and rentals, the heirs can immediately liquidate and not have to bother managing, and pay zero cap gains


How does one take maximum advantage of this earlier in one's life? Instead of selling appreciated assets, take loans against them?

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is it true that stepping up the basis also swipes out depreciation recapture?

rufflesinc (Aug. 28, 2017 @ 12:08p) |

yes 

Depreciation recapture doesn't follow the property after transfer at death.

https://www.irs.gov/publications/p544/ch0... (more)

jerosen (Aug. 28, 2017 @ 12:52p) |

does this stepped up basis rule also apply to properties owned by my LLC

rufflesinc (Sep. 21, 2017 @ 1:34p) |

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rated:
Try to die more than once?

rated:
There have been proposals (Hillary, etc) to do away with this, but the step up makes a lot of sense from a practical perspective.  FMV at death is pretty easy to get, while original purchase price decades ago through years of mergers and dividend reinvestments is a nightmare.  In the meanwhile, 

-don't sell appreciated assets if you're old (get margin loans or mortgages or whatnot)
- consider income generating investments with a return-of-capital component (some MLPs/REITs/CEFs) that reduces your basis but isn't taxable unless it goes negative so you get that income tax free
 

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Couldn't you gift appreciated assets to someone who is about to die and receive them back in your inheritance:

http://www.kiplinger.com/article/investing/T052-C001-S003-figuri...

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You also don't have to recapture depreciation. If you know you are going to keep the property until you die you can take the max amount. You can take advantage of this by maximizing the improvements value of your property when calculating depreciation. For instance on a 100k property have the land value at 10k instead of 40k. There also may be some accelerated depreciation you can take. By cost segregating you can depreciate certain parts of the property that have a lower lifespan than 39/27 years more quickly.

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DTASFAB said:   Try to die more than once?
  what about spouses , is there an advantage to titling stuff separately vs jointly?

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rufflesinc said:   
DTASFAB said:   Try to die more than once?
  what about spouses , is there an advantage to titling stuff separately vs jointly?

There's always an advantage having a spouse who tittles rather than one who does not.

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stanolshefski said:   Couldn't you gift appreciated assets to someone who is about to die and receive them back in your inheritance:

http://www.kiplinger.com/article/investing/T052-C001-S003-figuri...

  You could, but if the person died within a year of the transaction you wouldn't get the stepped up basis.

rated:
The real question is ... why? I think it's dumb to plan early in life for this step-up basis. First, I love my kids now, but they are toddlers. What if they are complete jerks in the future who won't come visit me? I'll still love them I suppose, but do I really care to save them from taxes. The savings ain't for me, cuz I'll be dead. The real time to start planning for this is when you are 80, and have a awesome relationship with your kids.

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Chill99 said:   The real question is ... why? I think it's dumb to plan early in life for this step-up basis. First, I love my kids now, but they are toddlers. What if they are complete jerks in the future who won't come visit me? I'll still love them I suppose, but do I really care to save them from taxes. The savings ain't for me, cuz I'll be dead. The real time to start planning for this is when you are 80, and have a awesome relationship with your kids.
but if you start planning only when you're 80, you might not have any significant capital gains to be tax-free?  if your kids still turn out to be jerks, you can always go out in a blaze of H&B

you have to pay cap gains if you sell a stock and buy another stock, but dont if you held the first stock the whole time

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Taking loans is far from guaranteed to be a good idea. Such strategies only seem to work if you are very close to death otherwise you end up spending more on loans then taxes.

Invest tax efficiently in your taxable and Roth convert when feasible from your tax deferred.

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dhodson said:   Taking loans is far from guaranteed to be a good idea. Such strategies only seem to work if you are very close to death otherwise you end up spending more on loans then taxes.

 

  but what if I can write off the interest since the loan is on a rental

rated:
That doesn't make the interest a "free" ride. Interest still adds up substantially over time. Just look at the amount paid on a 30 year home loan on interest even at today's rates.

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Fake your own death after you put yourself in another identity in your will. Do it over and over again. Lol, just a joke, don't do it.

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Remember that basis can also be stepped-down, i.e., basis to the beneficiary is FMV at date of death (or alternate valuation date).  So, it's generally wise for to sell underwater assets prior to death, to maximize income tax benefit.

ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

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tuphat said:   
ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

  what?

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rufflesinc said:   
tuphat said:   
ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

  what?

If your elderly great-great-great-grandaddy is sick and on his deathbed right now and bought a bunch of shares of USO back when oil cost over $100/barrel, now would be a good time to sell those shares of USO in order to lock in a long term capital loss on your great-great-great-grandaddy's 2017 income taxes, since there's no downside to taking such an action (unless your great-great-great-grandaddy lives beyond the 2017 calendar year and USO rebounds significantly within his lifetime).  Locking in such a loss may or may not benefit his estate, depending on other factors related to your great-great-great-grandaddy's 2017 tax return.  There's really not much of any other direct benefit to beneficiaries to do this, but helping to protect the assets of the estate means a bigger pie for everyone to slice up.

rated:
rufflesinc said:   
tuphat said:   
ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

  what?

  I was thinking about a MFJ couple.  Following example is from Forbes item linked below, there are other examples also. --

 Suppose Harry and Jane have separate brokerage accounts, each with a lot of stocks that have gone up and other stocks that have gone down. If Harry becomes gravely ill, he should sell his losers right away. Jane should hang on to her losers while selling enough winners to absorb Harry's capital losses.

Jane can immediately repurchase the stocks she sells, since the rule against wash selling, which means selling and then buying right back, does not apply to winning positions.

Result: Jane has raised the tax basis of her appreciated assets, reducing the tax bill if she sells them down the road.

https://www.forbes.com/sites/baldwin/2012/08/27/deathbed-tax-dod...

rated:
tuphat said:   
rufflesinc said:   
tuphat said:   
ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

  what?

  I was thinking about a MFJ couple.  Following example is from Forbes item linked below, there are other examples also. --

 Suppose Harry and Jane have separate brokerage accounts, each with a lot of stocks that have gone up and other stocks that have gone down. If Harry becomes gravely ill, he should sell his losers right away. Jane should hang on to her losers while selling enough winners to absorb Harry's capital losses.

Jane can immediately repurchase the stocks she sells, since the rule against wash selling, which means selling and then buying right back, does not apply to winning positions.

Result: Jane has raised the tax basis of her appreciated assets, reducing the tax bill if she sells them down the road.

https://www.forbes.com/sites/baldwin/2012/08/27/deathbed-tax-dodges-take-these-steps-now-to-save-later/#61c4877e5321

  Isn't that just a form of tax loss harvesting?

rated:
tuphat said:   
rufflesinc said:   
tuphat said:   
ETA:  You may also want to sell appreciated assets prior to death, if net capital loss limitation is an issue.

  what?

  I was thinking about a MFJ couple.  Following example is from Forbes item linked below, there are other examples also. --

 Suppose Harry and Jane have separate brokerage accounts, each with a lot of stocks that have gone up and other stocks that have gone down. If Harry becomes gravely ill, he should sell his losers right away. Jane should hang on to her losers while selling enough winners to absorb Harry's capital losses.

Jane can immediately repurchase the stocks she sells, since the rule against wash selling, which means selling and then buying right back, does not apply to winning positions.

Result: Jane has raised the tax basis of her appreciated assets, reducing the tax bill if she sells them down the road.

https://www.forbes.com/sites/baldwin/2012/08/27/deathbed-tax-dodges-take-these-steps-now-to-save-later/#61c4877e5321

  In other words, unrealized capital losses disappear at death. The losses should be realized by selling before death so that the spouse can use them.

rated:
rufflesinc said:   How does one take maximum advantage of this earlier in one's life? Instead of selling appreciated assets, take loans against them?
Yes, taking a margin loan will allow you to avoid selling if you need the cash - but be sure not to overpay for the privilege. Interactive Brokers has the lowest margin rates to the best of my knowledge.

If you know and trust someone who has substantial capital losses that they will never be able to use in their lifetime, you could gift that person the appreciated assets, which they could sell to make use of their capital loss. The IRS might take issue with it if that person simply turns around and gifts the proceeds back to you, but I'm sure that clever people could figure out ways around this.

 

rated:
HKnight said:   
... but I'm sure that clever people could figure out ways around this.

 

  The answer may lie somewhere herein:  http://kkwc.com/wp-content/uploads/2015/04/uf_Beware_of_the_Reci...

rated:
is it true that stepping up the basis also swipes out depreciation recapture?

rated:
rufflesinc said:   is it true that stepping up the basis also swipes out depreciation recapture?

yes 

Depreciation recapture doesn't follow the property after transfer at death.

https://www.irs.gov/publications/p544/ch03.html#en_US_2016_publi...

 

rated:
does this stepped up basis rule also apply to properties owned by my LLC

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