The Biden stepped-up basis proposal was never enacted. Congress did not pass the American Families Plan provision that would have eliminated the basis reset on inherited assets, and Internal Revenue Code Section 1014 still governs in 2026. Heirs continue to receive inherited property with a tax basis equal to its fair market value on the date of the prior owner’s death.1Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
What the Stepped-Up Basis Does Today
When someone dies and passes appreciated property to an heir, the tax basis resets to fair market value on the date of death. If a parent bought stock for $20,000 and it was worth $500,000 when they died, the heir’s basis becomes $500,000. Sell it the next day at that price, and there is no capital gains tax on the $480,000 of growth that accumulated during the parent’s lifetime.
The rule reaches stocks, bonds, real estate, business interests, and most other appreciated assets transferred at death. It also works in reverse. If inherited property has fallen below what the decedent originally paid, the heir gets a stepped-down basis at the lower value, and the family loses the ability to claim the capital loss.
Lifetime gifts work differently. A donee who receives appreciated property while the donor is alive takes the donor’s original cost basis and eventually owes tax on all the appreciation going back to the original purchase. That contrast between inheriting and receiving a gift has long shaped estate planning strategy.
What the Biden Proposal Would Have Done
The American Families Plan, released in April 2021, proposed treating death as a taxable event for capital gains purposes.2The White House. The American Families Plan Under this deemed-realization approach, a decedent’s unrealized gains would be taxed as if the assets had been sold at fair market value on the date of death. No actual sale had to occur. The estate would owe capital gains tax on the difference between the decedent’s original cost basis and the value at death.
The proposal also reached lifetime gifts. Capital gains would be triggered when a gift was completed for gift tax purposes, closing the strategy of giving away appreciated assets during life to sidestep tax that would otherwise come due at death or sale. Transfers to a U.S. spouse or to charity were carved out, carrying over the donor’s basis with no immediate tax.3U.S. Department of the Treasury. General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals
Who Would Have Been Affected
The proposal was never designed to hit every estate. The 2021 version included a $1 million per-person exemption from the deemed realization tax, effectively $2 million for married couples. Gains below that threshold would still pass to heirs without triggering tax.
The administration later raised the numbers. The fiscal year 2025 Treasury Green Book proposed a $5 million per-donor exclusion from recognition of unrealized capital gains on property transferred by gift or at death, portable to a surviving spouse for an effective $10 million combined exclusion, indexed for inflation after 2024.3U.S. Department of the Treasury. General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals
The Section 121 home sale exclusion would have continued to apply, letting individuals exclude up to $250,000 of gain on a principal residence and joint filers up to $500,000.4Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
Protections for Family Farms and Businesses
Family farms and closely held businesses were the biggest political flashpoint, because asset values can be large while cash on hand is not. The proposal let taxpayers elect not to recognize unrealized appreciation on family-owned and family-operated businesses until the business interest was sold or the business stopped being family-run. The deferral was designed to prevent families from being forced to sell a farm or business to pay a tax bill triggered by a death.3U.S. Department of the Treasury. General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals
For other illiquid assets that did not qualify for the family business deferral, the proposal offered a 15-year fixed-rate installment payment plan. Liquid assets such as publicly traded stocks would not have qualified. The IRS could have required security for deferred payments whenever it deemed security necessary.
The Capital Gains Rate Increase Attached to the Plan
The stepped-up basis change did not travel alone. The Biden plan also called for taxing capital gains at the same rate as ordinary income for taxpayers earning more than $1 million a year, pushing the top capital gains rate to 39.6% from the current maximum of 20%.
The 3.8% Net Investment Income Tax would still apply on top, for individuals with modified adjusted gross income above $200,000 ($250,000 for joint filers).5Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax Combined, the proposed top federal rate on capital gains would have reached 43.4%, more than double the current top effective rate of 23.8%.
Why It Never Passed
Despite detailed policy development across multiple Treasury Green Books, Congress never passed the deemed realization provisions. The tax pieces of the American Families Plan drew resistance from both parties, particularly from lawmakers representing agricultural districts and small business interests worried about the practical impact on family operations even with the proposed deferral and installment protections.
The broader legislative push was eventually narrowed into the Inflation Reduction Act of 2022, which focused on climate and healthcare spending and made no changes to the stepped-up basis. When the Biden administration ended in January 2025, the proposal had been shelved without a congressional vote on the specific deemed realization provisions.
What Actually Changed in 2026
The stepped-up basis survived, but 2026 brought separate changes to estate and income tax rules through the expiration of temporary provisions in the 2017 Tax Cuts and Jobs Act. These have nothing to do with the Biden proposal, but they matter for the same planning conversations.
The federal estate tax exemption dropped substantially. The TCJA had roughly doubled the basic exclusion amount, which reached $13.61 million per person in 2024. That temporary increase expired at the end of 2025, and the exemption reverted to its pre-2018 level of $5 million per person, adjusted for inflation.6Internal Revenue Service. Estate and Gift Tax FAQs More estates now exceed the threshold and face federal estate tax.
Individual income tax rates also reverted. The top marginal rate returned to 39.6% from 37% under the TCJA, and the lower brackets returned to 10%, 15%, 25%, 28%, 33%, and 35%.7Congress.gov. Expiring Provisions in the Tax Cuts and Jobs Act (TCJA, P.L. 115-97) Long-term capital gains rates themselves stayed at 0%, 15%, and 20%, but the income thresholds for each bracket shifted because those rates are tied back to the pre-TCJA ordinary income brackets.
The stepped-up basis is arguably more valuable now for estates that fall above the reduced exemption, because it still eliminates capital gains tax on appreciated assets even where the estate itself may owe estate tax. For families with significant unrealized gains, the interaction between the estate tax and the basis step-up is worth working through with a tax professional.