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Carryover basis. The proposed rule would mandate that the heirs would take on, or ‘carry-over,’ the basis of the decedent. In addition, the proposed rule would make death a transaction. Thus, in the example above, the heirs would have the basis of $200,000. In addition, they would have to pay capital gain taxes on a $2 million gain. Worse, if this gain took their Adjusted Gross Income over $1 million, they would pay ordinary income rates on the capital gain, plus the Net Investment Income Tax for total of 43.4%. Cost under the proposed rule goes from zero under step-up to $868,000 under carryover basis.
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