© 2021 Winston & Strawn LLP Biden Administration’s Tax Plans \\ 2
With the addition of state and local capital-gains
taxes, taxpayers with over $1,000,000 in taxable
income could be paying long-term capital-gains
taxes at a combined rate of over 58%, depending
on where they live.
ELIMINATE THE BASIS STEP-UP
FOR INHERITED PROPERTY
Current Law Taxpayers receive a basis step-up to
fair market value on stock, real estate, and other
capital assets inherited from an estate. In essence,
this basis step-up allows the imbedded increase in
fair market value to avoid capital-gains tax.
Biden Administration Proposal Calls for the
nullification of the basis step-up eects for gains
of $1,000,000 or more ($2,000,000 or more for
married couples filing a joint return).
The specifics for how this would be accomplished
are not entirely clear, but it appears the property
would carry a tax obligation in the amount of
embedded gain at time of death, with the tax
liability falling on the estate. A previous proposal
to limit the stepped-up basis, the Sensible Taxation
and Equity Promotion (STEP) Act of 2021, gave
families up to 15 years to pay the taxes owed on
certain assets.
Exceptions would be carved out for property
donated to charity and certain family-owned
businesses and farms that heirs continue to
operate.
ELIMINATE CARRIED-INTEREST
ELIGIBILITY FOR LONG-TERM
CAPITAL-GAINS RATES
Current Law Under certain circumstances, an
investment fund manager can treat “carried
interest,” which is essentially earned income from
fund management, as long-term capital gain.
This treatment allows the income to be taxed at
long-term capital-gains rates, which are currently
considerably lower than ordinary income rates.
Biden Administration Proposal Eliminate the
carried-interest rules. If the fund manager’s taxable
income is over the threshold for the top income tax
rate, the tax on the fund manager’s carried-interest
income could go from a rate of 23.8% (20% capital
gain rate + 3.8% surtax on NII) to 43.4% (39.6%
ordinary tax rate + 3.8% surtax on NII).
LIMIT AVAILABILITY OF
LIKE-KIND (SECTION 1031)
EXCHANGE TREATMENT
Current Law Tax gain or loss can be deferred
on exchanges of real property used for business
or held as an investment for “like-kind” property.
Properties are of like kind if they are of the same
character. This is the case regardless of whether
the properties dier in size or value.
Biden Administration Proposal Eliminate like-
kind exchange treatment for gains greater than
$500,000. This change would apply regardless of a
taxpayer’s taxable income.
MAKE BUSINESS LOSS-
LIMITATION RULE PERMANENT
Current Law Under the TCJA (Section 461(l)),
individuals operating a trade or business and filing
a Schedule C cannot deduct losses in excess of
$250,000 ($500,000 for joint filers). Excess losses
may be carried forward to future tax years. This
loss-limitation rule is currently set to expire in 2027.
Biden Administration Proposal Make permanent
the business loss-limitation rule.