It's two sides of the same coin. Imagine a simple example:
Mom and dad buy a house for $100,000. When they die it's worth $1,000,000. In Canada, you'd pay gains on the $900,000 difference. In America, you'd pay inheritance tax on the full $1,000,000 (but no capital gains). So in America you're paying tax on a little bit more (I'm of course ignoring the cap gains baseline exception).
But the reason America does it the way it does is because imagine it's not a house but a piece of art that mom and dad bought 50 years ago. No one know how they got it or what they paid for it. How does Canada even reconcile such a thing? How can you pay cap gains on it if you have no idea what it cost and no one is alive to even help you guess?
This year, the first $15,000,000 of an estate is exempt from federal taxes, so unless it is on top of a different $14,000,001 in estate net assets, the estate tax (a tax on the estate) on that $1,000,000 house is $0. [0]
Some U.S. states have an additional inheritance tax (payable by the inheritors). Those rules vary. [1]
Why? Inheritance taxes are kinda stupid anyway, you already taxed it when it went to the parents, taxing again when moving those assets to next of kin is double dipping.
I can understand step up being considered unfair but the alternative is someone inheriting their family's stuff and getting slapped with a potentially huge tax bill they don't have the cash to afford.
Well I think the idea is it wasn't already taxed in many cases. If you have assets that have greatly appreciated then that appreciation was never taxed.
This seems trivial? Just like any other asset when you are alive, if you cannot establish a cost basis it’s assumed at $0.
Easy stuff. If your benefactors care about taxes on their estate they will properly document capital assets. If not? Oh well. It was a windfall gain either way.
This is such a non-issue given the inheritance/gift tax limit being so high I don’t understand why it’s ever talked about.
It’s also not as onerous as people assume. I’ve established cost basis 15 years later on an asset I had no paperwork for by simply looking up the daily average price for said asset when I knew I acquired it. This can even be used for stuff like buying an expensive retail purchase - just use advertised retail cost. The IRS allows broad leeway so long as you are consistent and can explain your reasoning.
The question is not whether the alternative is perfect, the question is can it be made better than the status quo. It’s not that hard to come up with potential mitigations for the problems you state.
- A taxable threshold, so people who can’t afford lawyers and accountants don’t need to deal with it. Works well for family gifting.
- You don’t need to tax immediately, tax it when it the profit is realized, eg. When you sell that art.
- Taking out a loan against an asset at an increased valuation should trigger a taxable event. (Eg. Stocks go from 1b to 2b valuation and you take out a 500m loan. You are realizing 250k of gains and should pay tax on that gain.)
- Eliminate stepped up cost basis. This is a ridiculous give away.
The value of homes is very well known and assessed annually in many provinces (some have weirdly become laggards). So no real problem there.
Any piece of art that is of any real value would have a provenance and it would be very well known what the value it was at any given time and at sale. If no one knows the artist or can determine the value it is very safe to say its value is nil.
It's really not that easy at all. Especially with art or jewelry. We can know the current value. It could even be a very famous piece of art.
But these types of things are found all the time in attics and basements. Art especially is moved around without sales records all the time, and jewelry even more-so.
Heck, I have things I bought myself that I have no idea what I paid for them.
But I'd sure be upset if I had to pay cap gains taxes on these things assume their prior value was zero.
House purchase price might be easy to determine; although old records aren't always great; certainly the price paid indicated on the front of the deed is often a formal requirement value, not the actual price, so hopefully the real price was written down on the recorded deed too. I wouldn't rely on assessed values, at least without a lot of cross referencing many jurisdictions setup assessments so that they reflect market value, but jot directly.
On the other hand, cost basis in a house is not just the purchase price. Many improvements add to the cost basis, and good luck finding records to support that. Especially for a home owned by your parents since the 1970s.
That doesn't make it equitable to step-up on death; but it does make it very convenient.
yeah it's not perfect, but there's absolutely well enough data for the ballpark appraisal. Onus is not on the government to do any of this. So keep records folks.
I think the government now actually does keep tax records of buying and selling homes (became a bit of a question during the foreign buying debate) so going forward it's going to be no concern.
Mom and dad buy a house for $100,000. When they die it's worth $1,000,000. In Canada, you'd pay gains on the $900,000 difference. In America, you'd pay inheritance tax on the full $1,000,000 (but no capital gains). So in America you're paying tax on a little bit more (I'm of course ignoring the cap gains baseline exception).
But the reason America does it the way it does is because imagine it's not a house but a piece of art that mom and dad bought 50 years ago. No one know how they got it or what they paid for it. How does Canada even reconcile such a thing? How can you pay cap gains on it if you have no idea what it cost and no one is alive to even help you guess?