New Tax Bill Ends 'Step-Up in Basis,' Caps Capital Gains Rates, and Limits Real Estate Swaps Starting 2026

The "Equal Tax Act" is a major overhaul of how capital gains and inherited wealth are taxed, and it’s going to hit high earners and real estate investors particularly hard, starting in 2026. This bill essentially rewrites the rules for wealth transfer and investment income, aiming to ensure that appreciation in assets gets taxed at some point.

The Million-Dollar Line: Who Keeps the Lower Tax Rate?

First, let’s talk capital gains and dividends. Right now, long-term gains and qualified dividends get preferential tax treatment—meaning a lower rate than your regular paycheck. Section 2 of this bill changes that game for high earners. If your total taxable income, after accounting for the tax you owe under this new rule, clears the $1,000,000 threshold, you lose that lower rate. Your gains and dividends will be taxed as regular income. Think of it as a hard cap: if you’re a successful entrepreneur or investor making over a million a year, your investment income tax bill is about to jump significantly. However, there’s a smart carve-out: if you sell a qualifying family farm or business, that profit doesn't count toward the $1 million limit when determining if your other income qualifies for the lower rate. This protects long-time owners of family operations from being penalized if they sell their life’s work.

The End of the Tax Loophole at Death

Section 3 is the biggest change in this bill, and it’s the one that affects anyone planning to pass on appreciated assets. Currently, when you inherit an asset (like a house or stock portfolio), its cost basis gets "stepped up" to its fair market value on the day the owner died. This wipes out all the capital gains that occurred during the deceased person's lifetime. The Equal Tax Act eliminates this "step-up in basis." Instead, death or gifting is treated as a "deemed realization" event—meaning the asset is treated as if it were sold at fair market value right then and there. The capital gain is recognized immediately, and tax is due.

For most people, this means inheriting a highly appreciated asset—like a house bought decades ago—will come with an immediate tax bill, potentially forcing the sale of the asset just to cover the taxes. For example, if your parents bought a house for $100,000 and it’s worth $800,000 when they pass, the $700,000 gain is now taxable. This is a massive shift in estate planning and could create liquidity crises for heirs.

Targeted Relief for Inherited Assets

To soften the blow of the "deemed sale" rule, Section 4 introduces a $1,000,000 exclusion for realized capital gains upon inheritance. That means the first million dollars of gain recognized at death is tax-free for the heirs. This is a crucial detail that will shield many middle-class families and small estates from the full impact of the new rule. Furthermore, there's extra relief for qualifying family farms or businesses: gains above the $1 million threshold only get taxed on 50% of the amount, provided the heir commits to keeping the property in use as a farm or business for 10 years (120 months). If they break that commitment early, a tax "recapture" penalty kicks in, clawing back the tax savings.

If you do end up with a big tax bill from an inheritance, Section 6 offers a lifeline: you can elect to pay the tax in equal installments over five years at a significantly reduced interest rate (45% of the standard annual rate). This helps prevent heirs from being forced to sell property immediately just to pay the tax man.

Capping Real Estate Swaps and Business Deductions

Two other sections tighten up rules for investors and business owners. Section 7 puts a ceiling on the popular Section 1031 "like-kind exchange," which allows real estate investors to swap one property for another without paying capital gains tax. Starting in 2026, for non-farming real estate, you can only defer $500,000 of gain annually, with a $1,000,000 lifetime cap. This means large-scale real estate investors who frequently use 1031 exchanges to defer taxes indefinitely will have to fundamentally change their strategy.

Finally, Section 8 caps the amount of taxable income used to calculate the Qualified Business Income (QBI) deduction at $1,000,000. The QBI deduction is a huge benefit for small and mid-sized business owners who operate as pass-through entities (like S-Corps or LLCs). While the deduction itself isn't eliminated, this cap ensures that the tax break is primarily focused on businesses below the million-dollar income mark, mirroring the limits placed on capital gains.