The Equal Tax Act reforms the tax code by limiting preferential capital gains rates, taxing unrealized gains on large estates and gifts, and restricting certain tax-deferral strategies for high-income earners.
Edward "Ed" Markey
Senator
MA
The Equal Tax Act proposes significant changes to the Internal Revenue Code, effective after 2026, to limit preferential tax rates on dividends and capital gains for incomes exceeding $1 million. The bill introduces a "deemed realization" rule that triggers capital gains taxes on assets transferred via gift or at death, while providing specific exclusions and installment payment options for family farms and businesses. Additionally, the legislation places new caps on tax-deferred like-kind real estate exchanges and modifies deductions for qualified business income.
Equal Tax Act Triggers Capital Gains at Death and Caps Real Estate Deferrals Starting 2027
The Equal Tax Act aims to overhaul how the wealthiest Americans handle their investments by ending the 'buy, borrow, die' strategy. Under current rules, if you hold an asset until death, the value 'steps up,' and your heirs often skip paying taxes on the growth that happened during your lifetime. This bill flips the script: starting after December 31, 2026, passing away or giving a major gift is treated as a sale at fair market value, triggering capital gains taxes right then and there. While it targets high-net-worth individuals, it includes a $1 million exclusion for capital gains at death to protect the average nest egg, ensuring that most middle-class families won't see their childhood home or basic brokerage account hit by this 'death tax' transition.
The Million-Dollar Line in the Sand
For those earning the big bucks, the days of 20% preferential tax rates on dividends and long-term gains are getting a haircut. SEC. 2 of the bill limits those lower rates to the first $1 million of taxable income. If you're a tech executive or a successful founder clearing $2 million a year, every dollar over that first million will be taxed at ordinary income rates. This also applies to the Section 199A deduction, which many small business owners and freelancers use to shield 20% of their income; the bill caps this benefit to apply only to the portion of your income under the $1 million threshold. It’s a clear move to ensure that once you hit seven figures, your investment income starts looking a lot more like a regular paycheck to the IRS.
Protecting the Family Farm (With Strings Attached)
Recognizing that a multi-generational farm or a local hardware store might be worth millions on paper but have little cash on hand, the bill offers a specialized safety net in SEC. 4. If you inherit a family business or farm that’s been in operation for three of the last five years, you can exclude an additional 50% of the gain above the initial $1 million. However, there’s a catch: you have to sign a 120-month (10-year) commitment to keep the business running. If you decide to sell the land to a developer or shut down the shop in year five, the IRS will come knocking for a 'recapture tax'—essentially a pro-rated bill for the taxes you skipped at the time of inheritance.
New Rules for Real Estate and Trusts
Real estate investors who rely on '1031 exchanges' to swap properties without paying taxes will face new boundaries in SEC. 7. The bill caps deferred gains at $500,000 per year and sets a lifetime limit of $1 million, unless the property is a farm. This means a developer can’t indefinitely roll over massive profits from apartment complexes into new projects. Additionally, the bill takes a hard look at trusts, which are often used to park wealth for generations. Under SEC. 3, property held in a trust for 30 years is 'deemed sold,' forcing a tax payment even if the asset hasn't changed hands. To take the sting out of these new immediate tax bills at death, SEC. 6 allows executors to pay the tax in installments over several years at a discounted interest rate, preventing a 'fire sale' of family assets just to pay Uncle Sam.