H.R. 5336 (Equal Tax Act) narrows the preferential tax treatment for capital gains and dividends to the portion of gain that does not raise a taxpayer’s taxable income above $1,000,000. It also creates a deemed realization rule: most property transferred by gift or at death is treated as sold at fair market value, eliminates carryover basis for gifts after 2025, and directs that many gains recognized on death are includible in income subject to new reporting and payment rules.
The bill adds targeted carve-outs (spousal and charitable transfers, limited tangible property exceptions), a limited exclusion for small amounts of realized gain at death and an expanded family-farm partial exclusion tied to a 120-month ownership/use commitment, a five‑year installment option for certain estate-triggered tax liabilities, stricter caps on like‑kind exchanges, and a $1,000,000 cap on the amount of taxable income eligible for the 199A pass-through deduction. The package shifts tax burdens toward large estates and inter vivos wealth transfers and creates new compliance and valuation obligations for advisors, trustees, and the IRS.
At a Glance
What It Does
The bill: (1) restricts favorable 1(h) capital‑gains/dividend rates to gains that leave taxable income ≤ $1,000,000; (2) adds section 1261 treating most gifts and bequests as taxable sales at FMV with narrow exceptions; (3) ends carryover basis for gifts after 2025 (basis = FMV); (4) creates a limited $1M exclusion (and a 50% partial exclusion for qualifying family farms) for gain at death; and (5) adds reporting, installment payment, 1031 limits, and a cap on the Section 199A deduction.
Who It Affects
High‑net‑worth individuals, estates, family farms, private businesses and their acquirers, estate and gift planners, trustees, executors, tax preparers, and the IRS (for valuation and enforcement). Real‑estate investors and users of 1031 exchanges and owners of passive investment assets will feel direct impact.
Why It Matters
The bill converts longstanding step‑up/carryover basis and preferential‑rate rules into a framework that taxes many unrealized gains when ownership changes, thereby reducing lock‑in incentives and raising revenue from transfers. It replaces some estate planning techniques with new compliance, reporting, and cash‑flow constraints that will alter succession and gifting strategies.
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What This Bill Actually Does
The bill limits the benefit of the lower long‑term capital‑gains and qualified‑dividend rates by telling section 1(h) to apply only ‘‘to so much of such gain as does not cause the taxpayer’s taxable income to exceed $1,000,000.’’ That means gains that push a taxpayer’s taxable income over $1 million are taxed at ordinary rates (or otherwise subject to non‑preferential treatment). The change also expressly preserves the lower treatment for qualifying family‑farm or business transfers described elsewhere in the bill.
To capture unrealized appreciation on transfers, the bill inserts section 1261 into the Code. Under that rule, most property transferred by gift or at death is treated as sold for fair market value on the transfer date.
The statute carves out transfers to a spouse (and qualifying spousal trusts) and transfers to charities, limits application to certain tangible personal property (only if used in a trade or held for investment or as collectibles), and gives the Treasury rulemaking authority to block avoidance via trust modifications, transfers between related trusts, and long‑term trust strategies (including a 30‑year recognition rule for generation‑skipping trusts).The bill simultaneously rewrites basis rules: it eliminates the old carryover basis rule for gifts after December 31, 2025 (gifts after that date take a basis equal to FMV), tightens spousal transfer rules so transferees generally take transferor basis by statute, and adds cross‑references ensuring bases cannot exceed amounts treated as sold under section 1261. For transfers at death the bill also creates a targeted exclusion (section 139J) that excludes up to $1,000,000 of net capital gain at death from gross income, and allows a 50% exclusion on amounts above $1,000,000 for qualifying family farms or businesses that meet a 120‑month use/certification requirement, with recapture if use or ownership changes.Because taxing deemed sales at transfer can create liquidity problems, the bill gives executors and transferees a way to pay the incremental tax attributable to section 1261 death‑realizations over up to five equal annual installments (section 6168), subject to rules on eligible property and with interest computed under a special rule (the statute ties the interest rate to a fraction of the normal interest provision).
The measure builds enforcement mechanics: a new 6050Z reporting obligation for applicable gifts and bequests (names, TINs, FMV, and transferee basis), amendments to related‑party loss rules, and limits on common avoidance tools—like‑kind exchanges are capped ($500,000 annual nonqualified recognition cap and $1,000,000 lifetime cap) and the Section 199A deduction is limited to taxable income at the $1,000,000 threshold. Most provisions apply to transfers and taxable years after December 31, 2025.
The Five Things You Need to Know
Section 1(h) preferential rates for dividends and capital gains apply only to the amount of gain that keeps a taxpayer’s taxable income at or below $1,000,000 (taxable years after Dec. 31, 2025).
Section 1261 treats most gifts and transfers at death as sales at fair market value on the transfer date, but excludes transfers to a spouse, transfers to charities, and narrow categories of tangible personal property; it also authorizes regs targeting trust maneuvers and imposes a 30‑year rule for generation‑skipping trusts.
Gifts made after Dec. 31, 2025 receive a basis equal to fair market value (no carryover basis); transfers between spouses are governed by a revised section 1041 that preserves transferor basis but must comply with section 1261 limits on basis.
Section 139J excludes up to $1,000,000 of net capital gain realized at death from gross income and permits a 50% exclusion on excess gain for a qualifying family farm/business that certifies a 120‑month continued use, subject to pro rata 120‑month recapture if ownership/use changes.
The bill creates a five‑installment payment option (section 6168) for estate‑triggered capital‑gains tax with a special interest rule tied to 45% of the standard annual interest rate, plus new reporting (section 6050Z), 1031 exchange caps ($500k annual nonqualified, $1M lifetime), and a $1M cap on income eligible for the 199A deduction.
Section-by-Section Breakdown
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Limits preferential capital‑gains/dividend rates to taxable income ≤ $1,000,000
This provision rewrites section 1(h) to apply the lower capital‑gains and qualified‑dividend tax rates only to the portion of gain that does not push the taxpayer’s taxable income above $1,000,000. Practically, that splits a sale into two tax-rate buckets: the slice that keeps taxable income at or below $1M gets the preferential rate; additional gain is taxed as ordinary income for rate‑purposes or otherwise loses preferential treatment. The provision also clarifies family‑farm transfers described elsewhere are treated specially, preserving their eligibility for more favorable treatment.
Deemed realization on gifts and at death; trust and related‑party rules
Section 3 inserts a new §1261 that generally treats transfers by gift or at death as sales at fair market value on the transfer date. The statute lists several exceptions (spousal transfers and charities) and narrows application for tangible personal property. It adds tailored trust rules: grantor‑trust interests trigger recognition when owner status ends, non‑grantor trusts are treated as realizing upon transfers into trust, regulations may recharacterize trust modifications/transfers to prevent avoidance, and a 30‑year rule brings long‑held generation‑skipping trusts into realization. The section also amends related‑party loss rules so those rules don't conflict with deemed‑sale treatment and adds transitional base adjustments to ensuring basis consistency with recognized gains.
Limited exclusion for gains realized at death and family‑farm partial exclusion
Section 139J excludes from gross income up to $1,000,000 of net capital gain realized by reason of death, indexed for inflation and rounded to $10,000. It also provides a 50% exclusion on amounts above the $1M threshold for a qualifying family farm or business that satisfies a use/certification requirement to keep the property in farming or the family business for 120 months; failure to comply triggers pro rata recapture calculated over the 120‑month term. The provision imports and adapts rules from existing Code sections (e.g., §121 and §2032A) to define farming and material‑participation concepts and to govern hardship relief and ownership transfers.
New information returns for certain gifts and bequests
Section 6050Z requires the donor (or the executor in a death transfer) to report ‘‘applicable transfers’’ to the IRS and provide transferees statements that include recipient name/TIN, a description of the property, the property’s FMV, and the transferee’s basis. The reporting requirement captures gifts and bequests that are taken into account under §1261, excludes covered securities in certain respects, and leaves regulatory space for timing and de minimis rules. This creates a paper trail designed to deter under‑reporting and to give the IRS the data necessary to value transferred assets and enforced deemed‑sale taxes.
Five‑year installment payment option and special interest rule for estate‑realized gains
To address liquidity concerns, section 6168 lets taxpayers elect to pay the incremental tax attributable to §1261 recognition on death in up to five equal annual installments. The election must be made with the return and applies only to eligible property (not actively traded personal property). The statute also amends interest rules: interest on installment payments is addressed annually and section 6601 is altered to set a special interest rate tied to 45% of the normal statutory annual rate for liabilities extended under §6168. The bill adds related limitations on assessment periods for payments extended under this authority.
Caps on like‑kind nonrecognition for real estate
Section 7 narrows §1031 by adding quantitative caps: nonrecognition of gain on nonqualified property is limited to $500,000 per taxpayer per taxable year and a $1,000,000 aggregate lifetime cap. The bill preserves a narrower category of ‘‘qualified property’’ (farming uses or exchanges for like uses) that remains outside those limits. The practical effect is to constrain repeated tax‑deferred real‑estate rollovers used to indefinitely defer gain, especially for large investors and developers.
Limits pass‑through (199A) deduction to taxable income ≤ $1,000,000
This change restricts the §199A qualified business income deduction by applying it only to the portion of taxable income that does not exceed $1,000,000. It also redefines the income base for the deduction to exclude capital gains (so capital gain income above the $1M threshold cannot be offset through the §199A deduction). That reduces the sheltering of capital income via pass‑through businesses once a taxpayer’s taxable income crosses the threshold.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Taxpayers with taxable income at or below $1,000,000 — they retain preferential rates on at least some capital gains and dividends, and smaller estates or recipients may avoid large immediate tax bills because of the $1,000,000 exclusion at death.
- Family farms and qualifying small family businesses — they get a special 50% partial exclusion above the $1,000,000 threshold if they meet the 120‑month certification and use rules, which preserves intergenerational transfers for active farms/businesses.
- Charitable organizations and donors — transfers to qualifying charities are explicitly excluded from deemed‑sale recognition under §1261, preserving existing charitable‑giving tax incentives.
Who Bears the Cost
- High‑net‑worth individuals and estates — elimination of basis step‑up for most gifts and deemed realization at death will accelerate taxation of unrealized gains and raise expected tax bills on transfers.
- Estate planners, trust managers, and tax advisors — the new deemed‑sale, basis, reporting, and recapture rules increase compliance complexity and planning workload (valuations, new election planning, trust redesign), translating to higher advisory costs.
- Closely held businesses and family offices holding illiquid assets — paying tax on deemed sales or arranging installment elections will create cash‑flow and valuation challenges when asset liquidity is limited, pushing sales or leverage.
- IRS and courts — administering FMV valuations, auditing 6050Z reports, policing trust‑modification avoidance, and adjudicating recapture and hardship claims will demand administrative and litigation resources.
Key Issues
The Core Tension
The central policy conflict is straightforward: the bill forces recognition of accumulated, unrealized wealth at transfer to equalize taxation between labor and capital, but doing so trades away the lock‑in and liquidity accommodations that historically justified step‑up and carryover rules. Policymakers must weigh fairness and revenue objectives against administrative complexity, valuation disputes, and the economic strain of taxing illiquid wealth at the point of transfer.
Two implementation fault lines stand out. First, the law depends on FMV valuation at time of gift or death for many asset classes (private business interests, real estate, collectibles, partnership stakes).
Those valuations are inherently contentious and create a large burden for preparers and the IRS; disputes will multiply where market comps are thin. The statutory grants for regulations (trust anti‑avoidance, carryovers, and related‑party coordination) are broad, meaning Treasury rulemaking will determine much of the operational detail and conversion of the statute’s text into workable compliance rules.
Second, the bill tries to reconcile equity goals (tax unrealized gains on transfers) with liquidity realities via the five‑year installment option and the family‑farm carveouts, but tension remains. Installment payments reduce immediate cash demands but still require a taxpayer to secure value and pay interest; the statute’s special interest methodology (45% of the normal annual interest rate) is a novel construct that may be interpreted variably and could produce either relatively inexpensive deferral or, if the underlying statutory rate changes, unpredictable financing costs.
The 120‑month recapture framework for family farms reduces abuse risk but creates a long tail of compliance and potential transfer‑of‑ownership traps. Finally, the 1031 and 199A caps close familiar planning avenues, but taxpayers could respond with substituted avoidance strategies—more complex trust planning, intra‑family sales, or shifting asset ownership to jurisdictions or instruments not captured cleanly by the statute.
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