What's Yours Is The Government's!
Glenn Reynolds writes at USA Today:
Obama proposes to tax the appreciation on inherited homes. When you sell property at a profit, you pay capital gains on the difference between the basis (what you paid) and what you sell it for. (Obama also proposes to increase the capital gains rate). That's not a big issue for most middle class people, because right now if your parents leave you their house, you get what's called a "step-up" in basis.That means that the basis isn't what your parents paid for the house decades ago, but rather what it was worth when you inherited it. Thus, the appreciation your property experienced while your parents owned it comes to you tax-free. For many families, that appreciation is their biggest inheritance. Now, subject to some exemptions Obama plans to tax those gains, and other gains via inheritance.
Why would the White House even consider such a thing? As McArdle observes: "The very fact that we are discussing taxation of educational savings -- redistributing educational subsidies downward -- indicates that the administration has started scraping the bottom of the barrel when seeking out money to fund new programs. Why target a tax benefit that goes to a lot of your supporters (and donors), that tickles one of the sweetest spots in American politics (subsidizing higher education), and that will hit a lot of people who make less than the $250,000 a year that has become the administration's de facto definition of 'rich'? Presumably, because you're running out of other places to get the money."
When a government is desperate for cash, it goes after the middle class, because that's where the money is. Yes, the rich are rich, but the middle class is far more numerous. And this has raised other fears. As McArdle also notes, if 529 plans aren't sacrosanct, what about Roth IRAs? People have worried for a while that the government might go after retirement accounts as another source of income -- to the point that there have even been calls for Congress to make such grabs explicitly off limits.
...The truth is, in our redistributionist system politicians make their careers mostly by taking money from one group of citizens that won't vote for them and giving it to another that will. If they run short of money from traditional sources, they'll look for new revenue wherever they can find it. And if that's the homes and savings of the middle class, then that's what they'll target.
Beyond the money, what this inheritance tax would mean for some is that they'd lose the home their parents willed to them -- a home they are perhaps living in.
The reason a house built in 1970 is worth more dollars today isn't because the house got nicer, it's because the dollars are worth less.
So let me get this straight. The Fed (and government) devalues the dollar, then taxes you on the dollar's devaluation.
Clearly I'm in the wrong line of work.
Pirate Jo at January 29, 2015 7:26 AM
Yep, imposing new taxes on the middle class is going to be the government's modus operandi for the foreseeable future. Neither party really has an issue with it. The Democrats are reviving and maintaining a centuries-old patrician hatred of the middle class, whom they regard as economic and political party-crashers. The Republicans will take the middle class for granted because they think the middle class has no other choice. The number of people who got wealthy through honest work is decreasing, and the number who got wealthy through political connections and corruption is going up. It's becoming impossible to tax them because, for political reasons, they cannot be prosecuted if they don't pay their taxes.
And McArdle is right. That's the reason I don't have a Roth IRA. When the government tries to encourage you to engage in a particular economic activity now by promising that it won't be taxed in the future, they lie.
Cousin Dave at January 29, 2015 7:27 AM
I'd rather invest in working less. Enjoy my life more today and starve the parasitic beast.
Others can keep slaving away all year long, throwing their extra money into a broken and fraudulent financial system, and pay hefty taxes for the privilege of doing so. If they get their retirement dream, more power to them, but I'm not counting on it for myself.
I don't have a martyr complex. Some people might pride themselves on how much they pull the wagon, but after a while you may decide it's not something to be proud of.
Pirate Jo at January 29, 2015 8:00 AM
Beyond the money, what this inheritance tax would mean for some is that they'd lose the home their parents willed to them -- a home they are perhaps living in.
You did see the exemption values before you jumped on this, right?
Inherited capital gains tax doesn't start until $100K (single)/$250K (married).
On a house the appreciation would have to be over $250K (single)/$500K (married).
I guess I'm not "middle class" anymore. (TUNE IN AT 11!!)
drcos at January 29, 2015 8:20 AM
"You did see the exemption values before you jumped on this, right?
Inherited capital gains tax doesn't start until $100K (single)/$250K (married)."
My parents had their house built in 1970, on 2.5 acres, near the coast in central California. Cost: $35,000. I inherited said property in 2013 Value: $500,000. They weren't rich, I'm not rich. I live in the house and make ends meet. The fact is property is expensive here these days, and a $100,000 exemption doesn't cover squat if you inherit a house in this area.
matt at January 29, 2015 9:05 AM
"On a house the appreciation would have to be over $250K (single)/$500K "
Or a $250,000 exemption even. I'm single.
Matt at January 29, 2015 9:07 AM
Not much to like here, but I do agree with increasing the taxes on capital gains. I've heard the usual argument.
At least he's not talking about intangibles tax.
Patrick at January 29, 2015 9:54 AM
My parents had their house built in 1970, on 2.5 acres, near the coast in central California. Cost: $35,000. I inherited said property in 2013 Value: $500,000.
All this means is that it takes $500,000 to buy what you used to be able to purchase for $35,000.
The government did this to us, now it adds insult to injury by taxing you on the purchasing power you have lost.
And also, this whole real estate bubble has been completely engineered. In a normal world, a house would not be viewed as an "investment" but as a depreciating asset.
Pirate Jo at January 29, 2015 9:54 AM
You did see the exemption values before you jumped on this, right?
Oh, like that never changes...
a house would not be viewed as an "investment" but as a depreciating asset
Except it doesn't depreciate, per se, unless you're unwilling to put money in to maintain the structure. Depending on the when it was built, and the materials used, older houses may well retain better value and be more easily maintained than fancy new houses build with the cheapest material available.
Besides, one has to live some where. If you're renting, you're paying full value property taxes, the maintenance, and profit for the owner.
I R A Darth Aggie at January 29, 2015 10:38 AM
Except it doesn't depreciate, per se, unless you're unwilling to put money in to maintain the structure.
The fact that you have to spend money on them in order to maintain their condition is why they are called depreciating assets - much like cars, really. I mean, I'm not complaining about this fact. Appliances need to be replaced, painting needs to happen - windows, roofs, etc. That's just life.
It's just that only in a completely bizarro world would anyone be willing to go into debt for thirty years to buy a car, and then expect its value to go up over time.
If things even remotely approached sanity, people wouldn't take on mortgages of more than 5-10 years to buy a home. It would be widely recognized and acknowledged that the way you make money from a house is by paying it off quickly and then living in it for decades without having to make mortgage or rent payments.
I also realize we are not even remotely approaching sanity.
Anyway, my parents bought 40 acres of land in rural Iowa back in 1975 and built a four-bedroom ranch house on it for a grand total of $50,000. Maybe they could sell it to me for ten dollars and take a capital gains loss against their taxes.
Pirate Jo at January 29, 2015 10:55 AM
The middle class can be attacked and cannot fight back. The middle class cannot afford most tax shelters, cannot move their money overseas, and cannot live off of money hidden in a mattress or in gold bars in the basement since most of their household operating income is from their paychecks.
The rich (the real rich, not the high income "rich"), can simply move, hide, or shelter their money.
In addition, the truly wealthy have legions of accountants to help them reduce their tax burden, whatever the government's tax policy happens to be.
In order to stay middle class (or advance), the middle class needs to put away money for college, retirement, etc. Most of these things have to be done under the watchful, and often predatory, eye of the government.
That's why "soak the rich" taxation policies generally boomerang and sock it to the middle class instead.
Conan the Grammarian at January 29, 2015 11:57 AM
"If you like your house, you can keep it."
Why in hell doesn't anyone recognize the consistency here? Public schizophrenia?
Government wants to TELL YOU what benefits you must offer employees. It is pushing to TELL YOU what you must PAY your employees.
And you don't see that these are both ways to control the amount of wealth one person may accumulate?
This is the government taking advantage, constantly, of the American's new desire to be taken care of. In trade for a promise that "someone else" will do {name dirty work here}, the vote will ALWAYS be for that someone else to do something.
Radwaste at January 29, 2015 12:37 PM
You did see the exemption values before you jumped on this, right?
Oh, like that never changes...
a house would not be viewed as an "investment" but as a depreciating asset
Except it doesn't depreciate, per se, unless you're unwilling to put money in to maintain the structure. Depending on the when it was built, and the materials used, older houses may well retain better value and be more easily maintained than fancy new houses build with the cheapest material available.
Besides, one has to live some where. If you're renting, you're paying full value property taxes, the maintenance, and profit for the owner.
Posted by: I R A Darth Aggie at January 29, 2015 10:38 AM
All houses depreciate. And the maintenece you are talking about isn't free.
Try this little experiment. Buy a house in 1995 with a thirty year loan.
Live in it for twenty years. Add up every dime you have put into the house, principle, interest, taxes and maintenece costs,
And then sell the house, pay off the loan, and compare the two numbers. Last step adjust for inflation.
and no, the tax deduction, doesn't make it "worth it'"
It is possible to make a money in real estate by using inflation to your advantage, because rents rise with inflation, while loans costs do not, but it is a complex game, and not for people with no math skills.
And if you think real estate always goes up in value, consider downtown Detroit, or Scranton PA.
Isab at January 29, 2015 2:52 PM
And yes IRA Darth Aggie, you may have to live somewhere but renting gives you flexibility.
If you aren't going to be somewhere long term, the transactional costs, in getting a loan, buying a house, and then selling the house will often swamp the cost of renting, especially if you are lucky to find someone with a place to rent that they own free, and clear, and can accept less rent than they could if they need to cover the costs of a loan on the property.
Isab at January 29, 2015 3:03 PM
. . . politicians make their careers mostly by taking money from one group of citizens that won't vote for them and giving it to another that will."
This, we need to find a way to end this system. Only when those who are voting for the free stuff have to start paying will it end. However, by the time that kicks in, it may be too late to fix.
charles at January 29, 2015 5:13 PM
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