The Trump administration is considering a plan to give real estate investors and homeowners a $100 billion tax cut. This would be achieved not through the legislative process but instead unilaterally through the redefinition of a single word.
In a sideline interview at the Group of 20 summit in Argentina this month, Treasury Secretary Steven Mnuchin expressed willingness to circumvent Congress by using regulatory powers to redefine the meaning of “cost” when calculating capital gains.
Mnuchin’s plan would consider inflation as an addition to the original cost basis of property, allowing Americans to deduct the impact of inflation in determining taxable capital gains.
“If it can’t get done through a legislation process, we will look at what tools at Treasury we have to do it on our own and we’ll consider that,” – Mnuchin
Currently, taxpayers calculate capital gains by subtracting the original cost basis from their sales proceeds. For example, if a couple purchased a home for $10,000 back in 1960 and are selling the home for $800,000 then their capital gain would be $790,000. Although the couple would most likely qualify for a $500,000 home owner exclusion, they would still owe tax on $290,000 of capital gains (most of which presumably derived from 58 years of inflation).
By factoring in the cost of inflation this couple could potentially eliminate their entire capital gain and save tens of thousands of dollars in tax.
Although this change could save homeowners thousands of dollars in tax, some are viewing this potential regulatory change as a direct benefit to the rich. The biggest gains would go to real estate investors who stand to save millions of dollars in taxes if this change comes to fruition.
Because income from capital gains is concentrated at the upper end of the income distribution, benefits of this change would accrue primarily to high income households. According to a budget model generated by the University of Pennsylvania
“The top one percent of tax units would receive more than 86 percent of the tax cut, and that after tax-incomes would increase most for the top 0.1 percent.”
Retirement account holders may not benefit from this change due to the nature of these investments. Since distributions from these accounts are classified as retirement income and not capital gains, holders of 401Ks and IRAs won’t benefit from the deduction of inflation.
Those who will benefit most from this regulatory change might want to hold off on any celebrations as Mr. Mnuchin has emphasized that he had not concluded whether the Treasury Department had the authority to act alone.
“We are studying that internally, and we are also studying the economic costs and the impact on growth.” – Mnuchin
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