Federal Tax / Estate Tax Reform

In 2001, Congress enacted legislation to phase out the estate tax, with full repeal scheduled to occur in 2010.  Because of unique procedures associated with passage of the 2001 legislation, however, the estate tax was set to be reinstated as of January 1, 2011, at its pre-2001 levels. The amount excluded from estate tax would have been $1 million. Any remaining taxable estate would have been taxed at a maximum rate of 55%.

Technically, the estate tax was repealed for 2010, but, as a practical matter, the repeal was never activated.  In December 2010 Congress, with President Obama's approval, voted to extend the 2009 estate tax rate through December 31, 2012. The estate tax exclusion was increased to $5 million (from $3.5 million) for 2010-2012, and the maximum tax rate was reduced to 35%.

However, without action by Congress, the pre-2001 estate tax rules ($1 million exemption and 55% rate) were set to become effective for those who died on or after January 1, 2013.

Fortunately, Congress and President Obama enacted the "American Taxpayer Relief Act (ATRA) of 2013" on January 2, 2013.  This Act made permanent the changes Congress made to the estate tax rules in December 2010, except that the top estate tax rate was increased from 35% to 40%. Thus, for decedents dying after December 31, 2015, the estate tax exclusion is $5.45 million per person (the $5 million amount from 2010, indexed for inflation), and the top tax rate is 40%.

The estate tax was further changed by the Tax Cuts and Jobs Act of 2017, which temporarily (from 2018 through 2025) increased the estate tax exclusion from $5.45 million to $11.4 million per person, plus adjustments for annual inflation.  Thus, the exclusion amount for a couple is now $22.8 million, plus cumulative inflation factors since 2017.

Some Republicans in Congress are still pursuing full repeal of the estate tax. However, many others on both sides of the political aisle believe the higher amounts of today’s exclusion are about as good as is likely to be enacted in the current political environment.

The great amount of uncertainty that has surrounded the estate tax rules for the past two decades has been confusing and frustrating to owners and investors (and prospective owners and investors) of real estate.  While many policy makers were pleased with the 2001 Act's scheduled repeal of the estate and gift tax, others felt there should be some level of estate tax left in place, although with higher thresholds and lower tax rates. The provisions made permanent in ATRA of 2013 represented a genuine compromise between the parties.  However, the large increase in the exclusion enacted in 2017 in a bill supported by Republicans only have upset this compromise.  Currently, many policy makers on the Democratic side are calling for higher taxes on wealthier Americans.

NAR generally supported repeal of the estate tax but was opposed to certain other portions of the 2001 Act, such as the provisions that required the use of so-called "carryover basis." If repeal cannot be achieved, NAR supports the lowest possible rate (but in no event a rate higher than the maximum capital gains tax rate) and a substantial exclusion.

Proponents of estate tax repeal believe that individuals should be able to pass their property at death to whomever they wish without having to pay a tax. Others believe the estate tax harms economic growth and kills jobs by causing family-owned businesses to have to be liquidated to pay the tax.

Opponents of NAR policy believe that one of the reasons we have an increasing amount of inequality of wealth in our society is that the tax laws favor high-income and wealthy taxpayers, and that a more equitable public policy would assess a much higher rate of tax on accumulated wealth so that not as much of it is passed on to heirs.

During his 2020 presidential election campaign, President Biden indicated that he would reverse some of the changes made to the estate tax regime to tax more large estates. Many of his Democratic colleagues in Congress support this idea.

None at this time.