Estate Tax Reform - IBP
Estate Tax Reform

May 24, 2006

Tax Committee
Federal Issues Committee
Legislative CommitteeThis Issues Briefing Paper is for discussion purposes only and has not been approved by the Taxation Committee, Federal Issues Committee, Legislative Committee or the Board of Directors.Issue:  Should C.A.R., in conjunction with NAR, seek an estate tax regime that provides stepped-up basis for all inherited assets.  If the scheduled 2010 estate tax repeal is rescinded, that C.A.R. support a revision that (a) permits stepped-up basis, (b) taxes all assets in an estate at the same rate (i.e., rates would not depend on the type of asset), (c) excludes an amount comparable to the $5 million exclusion that would be in effect in 2010, (d) provides estate tax rates that, as nearly as possible, are the same as the tax rate for long-term capital gains,but in no event higher than the 2006 individual tax rates of the same income tax structure and (e) indexes the estate tax exclusion amounts for inflation.”Action: Action requested at this time due to the expected upcomingdebate and vote on this issue in the 109th Congress and policy taken by NAR at their May Mid-Year Meetings.Options:   
1. Take a “Support”position.
2. Take a “Oppose” position
3. Take a “Neutral” Position.
4. Take a “Not Real Estate Related” Position
5. Take a separate position from NAR.Background:  The Economic Growth and Tax Reconciliation Act of 2001 set in motion a ten-year plan to increase the exemptions from the estate tax and lead tofull repeal in 2010.  Effective in 2010, the estate tax will be repealed. In the interim, the amount of the exclusion will gradually increase from $675,000 to $3 million and the estate tax rates are gradually reduced from a maximum of 50% to a maximum of 45%.  However, in 2011, the estate tax laws will revert to that laws that were in effect on June 6, 2001.As under prior law, the basis of assets received between 2001 and 2010 is "stepped up" to its fair market value at the time of death. When repeal comes into effect, the estate will not be taxed, but the basis of assets that heirs receive will be "carried over" so that the basis in the hands of the heir is the same as the basis of the previous owner.On April 13, 2005, to pass H.R. 8, the Death Tax Repeal Permanency Act, which would make permanent the death tax repeal after 2010.  Currently, Senate Majority Leader Frist has announced that he will seek a similar bill in the Senate in June2006.  In the Senate, both sides have accepted that full repeal is not possible within the current budget.  The major debate concerning the estate tax in the Senate currently is how high/low of an exclusion to set andwhat the tax rates should be.  It is believed that if a compromise is reached it would address those two major concerns.  Currently the range being discussed for the exemption would be between$3 million to $5 million.  The discussion concerning the compromise on estate tax rates currently is between 45% and the current capital gains tax rate of 15%.  In addition, it is believed that the compromise would allow for “stepped-up basis” instead of “carry over”.  However, it is believed that a full repeal of the estate tax would mean that there would only be a “carry over” provision.In January 2001C.A.R. took the position that “C.A.R., in conjunction with NAR, preserve the ‘stepped-up basis’ provision of current tax codes irrespective of modification or elimination of estate tax.”Status/Summary: InFebruary 2005, the House introduced H.R. 8, the Death Tax Repeal Permanency Act of 2005.  H.R. 8 was introduced by Representative Hulshof (R-MO).  There were 206 cosponsors of H.R. 8 including California Representatives: Bono, Calvert, Cardoza, Drier, Gallegly, Herger, Issa, Lungren, Gary Miller, Nunes, Radanovich, and Rohrabacher.  H.R. 8 would extend the Economic Growth and Tax Reconciliation Act of 2001 section of Estate Tax to make the full repealpermanent.  On April 13, 2005 H.R. 8 was passed by a vote of 272-162.In February 2005 the Senate also introduced an identical legislation in S. 420.  S. 420 was introduced by Senator Kyl (R-AZ).  There has been no vote on S. 420 as of this date.  Currently there are 22 cosponsors; however, neither Sen. Boxer nor Sen. Feinstein are cosponsors.  Senate Majority Leader Frist has made estate tax reform a major topic for the 2006 midterm elections.  His original intent was to bring estate tax reform to the Senate floor in May 2006.  However, due to numerous bills being delayed, such as immigration reform, supplemental spending, and tax reconciliation, estate tax reform is not expected to make it to the Senate floor until June 2006.

Arguments in favor of repealing the estate tax:
  • Taxes have already been paid on the housethrough property taxes. This is a double tax.
  • This will help small farms and families to keep property when a loved one passes away.
  • With the rising prices on real estate, the estate tax will soon affect the middle class even greater.  Family homes will have to be sold in order to pay for the taxation instead of allowing generations to inherit the home their families built.
Arguments against repealing the estate tax:
  • Full repeal of the estate tax would likely mean that when property is transferred it will be with a “carry over” basis.  This means that families will still be hit with large taxation issues when attempting to sell the real estate.
  • A compromise would allow for the middle class to avoid this tax while only taxing the largest ofestates.
  • Elimination of this tax means a loss in revenue, which will have to be replaced with other eliminations of deductions.  This means that mortgage interest, Home Equity Lines of Credit, and mortgage on second homes could be targeted.
Outlook:  The House has already taken up and passed legislation that would fully repeal the estate tax.  The Senate is expected to take this debate up in June 2006.  It is believed that there are not enough votes for a full repeal, so instead the Senate will seek a bipartisan compromise on the estate tax.  The current belief is that a compromise would increase the threshold that an estate much meet in order to be taxed, the range discussed is between $3 million to $5 million, as well as reducing the amount that those estates will be taxed, bringing the rates between 45% and the current capital gain rates of 15%.  In addition, it is believed that the compromise would allow for “stepped-up basis” instead of “carry over”.  If a compromise is reached, the House may choose to eliminate aconference and instead take up the Senate legislation and vote on the Senate compromise.NAR Position:  At the 2006 Mid-Year Meetings, NAR took the following policy: “That NAR seek an estate tax regime that provides stepped-up basis for all inherited assets.  If the scheduled 2010 estate tax repeal is rescinded, that NAR support a revision that (a) permits stepped-up basis, (b) taxes all assets in an estate at the same rate (i.e., rates would not depend on the type of asset), (c) excludes an amount comparable to the $5 million exclusion that would be in effect in 2010, (d) provides estate tax rates that, as nearly as possible, are the same as the tax rate for long-term capital gains, butin no event higher than the 2006 individual tax rates of the same income tax structure and (e) indexes the estate tax exclusion amounts for inflation.”
C.A.R. Policy:  In January 2001 C.A.R. took theposition that “C.A.R., in conjunction with NAR, preserve the ‘stepped-up basis’ provision of current tax codes irrespective of modification or elimination of estate tax.”
Should C.A.R., in conjunction with NAR adopt the following policy:  “That C.A.R., in conjunction with NAR, seek an estate tax regime that provides stepped-up basis for all inherited assets.  If the scheduled 2010 estate tax repeal is rescinded, that C.A.R. support a revision that (a) permits stepped-up basis, (b) taxes all assets in an estate at the same rate (i.e., rates would not depend on the type of asset), (c) excludes an amount comparable to the $5 million exclusion that would be in effect in 2010,(d) provides estate tax rates that, as nearly as possible, are the same as the tax rate for long-term capital gains, but in no event higher than the 2006 individual tax rates of the same income tax structure and (e) indexes the estate tax exclusion amounts for inflation.”
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