The Equal Tax Act removes much of the preferential tax treatment for capital gains by limiting preferential rates to the portion of gain that does not push a taxpayer’s taxable income above $1,000,000, while preserving narrow farm-business exceptions. It establishes a new deemed-realization rule that treats most transfers by gift or at death as a sale at fair market value, eliminates carryover basis for post-2026 gifts, and enacts a package of reporting, payment-timing, and anti-avoidance rules.
Taken together, the changes aim to reduce step-up‑in‑basis planning and close transfer-based tax avoidance routes (including limiting 1031 exchanges and tightening the qualified business income deduction). The bill creates significant compliance tasks for fiduciaries, trusts, family offices, and advisors and creates new liquidity and valuation issues for heirs and small estates (with a narrow, certified exclusion and a multi-year payment option for tax liabilities).
At a Glance
What It Does
The bill (1) limits preferential capital-gains/dividend tax treatment to the portion of gain that keeps taxable income at or below $1,000,000; (2) adds section 1261 to treat most gifts and transfers at death as sales at fair market value (with specified exceptions); (3) removes carryover basis for gifts after 2026 and adjusts spouse-transfer rules; and (4) creates reporting, installment payment, and anti‑avoidance rules and narrows 1031 and 199A benefits.
Who It Affects
High‑net‑worth taxpayers and their estates, fiduciaries and executors, family offices and grantor trusts, real‑estate investors who rely on like‑kind exchanges, family farms meeting certification requirements, and tax compliance professionals advising wealth transfers.
Why It Matters
This is a structural change to wealth‑transfer taxation: it targets the step‑up‑in‑basis regime and grounds a range of longstanding planning strategies. For tax directors, estate planners, and compliance teams, it raises valuation, timing, reporting, and liquidity issues that will drive new operational processes and possible business-structure changes.
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What This Bill Actually Does
The Equal Tax Act has three interlocking ambitions: reduce preferential treatment for capital income at the top of the distribution, eliminate the near‑automatic step‑up in basis on intergenerational transfers, and plug transactional workarounds (like broad 1031 uses and certain QBI treatment). Section 2 limits the current preferential rates under Code section 1(h) so those rates apply only to the amount of capital gain that does not cause taxable income to exceed $1,000,000.
That cap is computed after including all other taxable income, and the bill explicitly preserves a special treatment for qualifying family farm or business transfers defined later in the bill.
Section 3 creates a new deemed‑realization rule (new section 1261). Under that rule most transfers by gift or at death are treated as if sold at fair market value on the transfer date.
The text builds in key exceptions — transfers to a spouse or surviving spouse (and qualifying spousal trusts) and transfers to charities — and limits the application to certain kinds of tangible personal property. The provision contains detailed trust rules: grantor trusts, distributions, a 30‑year forced realization rule for long‑running non‑grantor trusts, and authority for the Treasury to draft anti‑avoidance regulations on trust modifications and transfers.
Related‑party loss rules are adjusted to avoid mismatches, and the Code’s basis provisions are rewritten: carryover basis is eliminated for gifts after 2026 (basis becomes fair market value on gift), transfers between spouses generally keep the transferor’s basis, and basis in heir hands is capped at the amount for which the property was treated as sold under section 1261.To soften the blow for small estates and farm continuity, the bill adds section 139M: a $1,000,000 exclusion of net capital gain on transfers at death (indexed for inflation), plus a 50 percent exclusion on amounts above that threshold for qualifying family farms or businesses that meet a 120‑month post‑bequest use certification. That farm exclusion is subject to a recapture formula that phases out benefits over a 120‑month period if the farm ceases qualifying use or is disposed of.
The bill also imposes new reporting requirements on large gifts and reportable bequests (new section 6050BB), provides a multi‑year payment elective (section 6168) to spread certain death‑related capital‑gains taxes over 2–5 equal installments, and sets a special interest rule tied to section 6601 (interest on an extension is 45% of the normal annual rate). Finally, the bill narrows sheltering mechanisms by capping nonrecognition for most 1031 real‑estate exchanges ($500,000 per year, $1,000,000 aggregate) and restricting the 199A qualified business income deduction to taxable income up to $1,000,000 and excluding net capital gain from the 199A computation.
Almost all changes apply to transfers or taxable years beginning after December 31, 2026.
The Five Things You Need to Know
The bill limits preferential capital‑gains/dividend rates so they apply only to the amount of gain that keeps a taxpayer’s taxable income at or below $1,000,000 (section 1(h) amendment).
New section 1261 treats most gifts and inheritances as if sold at fair market value on the transfer date, with express exceptions for transfers to spouses, charities, and limited tangible personal property categories, and detailed trust anti‑avoidance rules.
Carryover basis for gifts is eliminated for property gifted after December 31, 2026; basis for such gifts is the fair market value at transfer, and heir basis is capped to the amount treated as sold under section 1261.
Section 139M excludes up to $1,000,000 of net capital gain realized at death (indexed), and provides a 50% exclusion for qualifying family‑farm or business gain above that amount subject to a 120‑month certification and recapture regime.
Executors may elect to pay section‑1261 tax attributable to death‑realization in 2–5 equal annual installments (first due with the return), and interest on extended amounts is charged at 45% of the standard annual interest rate under section 6601.
Section-by-Section Breakdown
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Short title
Gives the bill the name "Equal Tax Act." This is the formal heading and has no substantive effect, but it clarifies legislative intent to equalize treatment of capital gains and earned income.
Cap on preferential rates — $1,000,000 taxable‑income carve‑out
Amends Code section 1(h) so the preferential capital‑gains/dividend rates apply only to the portion of gain that does not cause the taxpayer’s taxable income to exceed $1,000,000, computed after all other taxable income. The amendment preserves an explicit exception for qualifying family farms or businesses defined later, so those transfers can receive special treatment even if they would otherwise push income above the threshold. Practically, this converts a rate structure into an income‑capped carve‑out rather than a flat preferential regime and requires consolidated taxable‑income calculations to determine how much gain is taxed preferentially.
Deemed realization at gift or death
Adds section 1261 to treat most property transferred by gift or at death as sold at fair market value on the date of transfer. The provision lists statutory exceptions (spousal transfers, charity contributions) and narrows application to certain tangible personal property categories only when not otherwise investment or business property. The section also empowers Treasury to issue anti‑avoidance regulations and sets out timing rules that convert transfers into realization events — a foundational change that brings inter vivos and testamentary wealth transfers into the income tax base.
Trust and related‑party mechanics
Section 1261 contains granular trust mechanics: grantor‑trust assets are treated as realized when the grantor ceases to be treated as owner; non‑grantor trust assets can trigger realization on transfers into or out of trusts; a 30‑year forced realization rule prevents indefinite deferral inside non‑grantor trusts; qualifying spousal trusts are sheltered until distribution or death of the spousal beneficiary. The bill also amends section 267 to avoid ordinary‑loss mismatches and gives Treasury explicit rulemaking authority to prevent trust reshaping that would defeat realization.
Elimination of carryover basis for post‑2026 gifts and spouse transfer rules
The bill rewrites sections 1015, 1041, and 1014 to eliminate carryover basis for gifts made after December 31, 2026 (basis becomes FMV at gift). Transfers between spouses generally retain transferor basis (modified 1041 mechanics), and the basis of property acquired at death is constrained not to exceed the amount for which the property was taxed under section 1261. These edits create strict alignment between recognized gain on deemed realization and basis in recipient hands, closing a major mismatch planning route.
Targeted exclusion for transfers at death and family‑farm relief
Creates an exclusion from gross income for up to $1,000,000 of net capital gain realized at death (indexed thereafter), and a 50% exclusion for qualifying family‑farm or business gain above that threshold subject to a binding 120‑month post‑bequest use certification and recapture rules. The recapture is pro‑rated monthly over the 120‑month period, with limited hardship carve‑outs and ability to pass recapture liability to an acquirer who assumes it in writing. This is the bill’s primary concession to liquidity and continuity concerns for small farms and modest estates.
Information reporting and installment payment/interest rules
Adds new reporting obligations (section 6050BB) requiring donors or executors to report transferee ID, description, FMV, and transferee basis for applicable transfers; sets timing and statement rules. Creates section 6168 allowing executors to elect 2–5 equal annual installments for tax attributable to death‑realization, with the first installment due with the return; cross‑references authority to require security and extends assessment periods. Section 6601 is amended so interest on installment‑extended amounts is charged at 45% of the standard annual rate, changing the effective cost of deferral.
Limits on 1031 exchanges and 199A deduction
Section 7 imposes limits on nonrecognition under section 1031 for real property: a $500,000 annual cap on excluded gain for non‑qualified property and a $1,000,000 lifetime aggregate cap, while allowing farming or purpose‑matched exchanges to remain qualified. Section 8 narrows the 199A qualified‑business‑income deduction by applying it only to the portion of taxable income up to $1,000,000 and excluding net capital gain from the 199A computation. These provisions restrict common sheltering strategies and narrow QBI benefits at higher income ranges.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Taxpayers with realized capital gains below the $1,000,000 taxable‑income threshold because a portion of their gain will still receive preferential rates rather than being fully reclassified, preserving preferential treatment for many middle‑to upper‑middle incomes.
- Heirs of estates where net capital gain at death is below the $1,000,000 exclusion — they avoid recognition of modest built‑in appreciation and retain liquidity advantages without new tax bills.
- Qualified family farms that meet the 120‑month certification benefit from a targeted 50% exclusion on gain above the base $1,000,000 exclusion, enabling continuity of farm operations where the recapture schedule is met.
Who Bears the Cost
- High‑net‑worth individuals and families who use gifts, trusts, or step‑up basis strategies to transfer wealth will face immediate income inclusion or higher tax on realized gains, increasing estate and capital‑gains tax liabilities.
- Executors, trustees, family offices, and tax advisors bear new compliance burdens — valuation at transfers, new reporting (6050BB), recapture monitoring for farm certifications, and electing/installment administration will require new processes and likely outside professional services.
- Real‑estate investors and syndicators who rely on broad 1031 deferrals and large like‑kind exchanges face annual and lifetime caps that can force taxable sales or restructure transactions; developers and investors will need to retool timing and deal economics.
Key Issues
The Core Tension
At its core the bill forces a trade‑off between tax equity (treating capital gains like labor income for high earners and preventing step‑up avoidance) and economic, administrative, and liquidity realities: equalizing rates and taxing unrealized appreciation creates immediate moneys‑in‑the‑door and reduces planning arbitrage, but does so by imposing valuation complexity and potentially triggering cash‑flow crises for heirs and small businesses — a policy choice between fairness in tax incidence and the practical burdens of converting paper gains into taxable events.
The bill resolves one equity concern — preferential treatment for capital income at the top — by creating several new, complex rules that raise practical and implementation questions. Valuation at gift or death will be a recurring litigation and compliance hotspot: trusts and estates lacking readily marketable comparable sales will need appraisals; disagreements over FMV could generate numerous taxpayer challenges and IRS resource demands.
The Treasury’s delegated regulation authority over trust modifications and the 30‑year forced realization rule will be consequential: narrow regulations could leave planning room, while broad anti‑avoidance rules could sweep in common estate arrangements.
Liquidity mismatches are another significant tension. For estates with largely illiquid but highly appreciated assets (private businesses, real estate, art), the deemed realization rule converts latent wealth into immediate tax liability absent relief.
The bill mitigates that with a $1M exclusion and an installment option, but the exclusion may be small relative to many estates and recapture rules for farms impose long‑term compliance burdens. The special interest rate (45% of the standard rate) reduces carry cost relative to normal interest but does not eliminate affordability problems for heirs without ready cash.
Finally, interactions with state estate/inheritance taxes and cross‑border transfers are unresolved in the text: differing basis, valuation, and timing rules across jurisdictions could create double taxation or require additional coordinated guidance.
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