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Arizona Step-Up in Basis: Double Step-Up
Support GuideArizona11 min read

Arizona Step-Up in Basis: Double Step-Up

How Arizona community property gives both spouses a full step-up in basis under IRC Section 1014(b)(6), cutting capital gains tax on inherited property.

By Settled Editorial

Arizona's community property status carries one of the biggest tax breaks in estate planning: the double step-up in basis. When one spouse dies, this break can erase the capital gains tax on appreciated property, and it can save families tens or even hundreds of thousands of dollars.

Understanding how the step-up works helps Arizona families make better decisions about how they hold property and how they plan their estates.

What Is Step-Up in Basis?

When you sell property, you pay capital gains tax on the difference between the sale price and your "basis" (usually what you paid for it).

Example without step-up:

  • You buy stock for $10,000
  • You sell it for $100,000
  • Capital gain: $90,000
  • Federal tax at a 15% long-term rate: $13,500, plus Arizona income tax

When you inherit property, your basis "steps up" to the fair market value at the date of the decedent's death. This erases the appreciation that built up during the decedent's lifetime. Internal Revenue Code Section 1014 provides this step-up.

Example with step-up:

  • Decedent bought stock for $10,000
  • Stock is worth $100,000 at death
  • You inherit it with a stepped-up basis of $100,000
  • You sell it for $100,000
  • Capital gain: $0
  • Tax owed: $0

Inherited property also counts as long-term automatically under IRC Section 1223(9), so a sale soon after death still gets long-term rates rather than higher short-term rates.

The Arizona Double Step-Up

In most states, when jointly owned property passes at death, only the decedent's share steps up. The surviving owner keeps the original basis on their share.

Arizona is different. Under IRC Section 1014(b)(6), 100% of community property receives a stepped-up basis when either spouse dies. This is the "double step-up."

Why Arizona Is Different

Arizona is a community property state, one of nine in the country. Property acquired during marriage with community funds belongs to both spouses together, and Arizona Revised Statutes Section 25-211 defines that community property. Because both spouses are treated as owning the whole of community property, the entire asset comes into the deceased spouse's estate for step-up purposes, not just half.

The Tax Savings

ScenarioOriginal BasisValue at DeathStepped-Up BasisGain if Sold
Common-law state (joint tenancy)$200,000$1,000,000$600,000$400,000
Arizona (community property)$200,000$1,000,000$1,000,000$0

In this example, the Arizona family avoids capital gains tax on a $400,000 gain, worth roughly $60,000 in federal tax at a 15% rate, plus the Arizona income tax the sale would have added.

Detailed Example

Diego and Elena, Phoenix residents, bought a home in 1998 for $160,000. By 2026 it is worth $760,000. Diego dies.

In a Common-Law (Separate Property) State

If the home were held as joint tenants in a separate property state:

  • Elena's half: keeps its original basis of $80,000
  • Diego's half: steps up to $380,000
  • Total basis: $460,000

If Elena sells for $760,000:

  • Capital gain: $300,000
  • Federal tax at 15%: $45,000
  • Arizona income tax at 2.5%: $7,500
  • Total tax: about $52,500

In Arizona

Because the home is community property:

  • Elena's half: steps up to $380,000
  • Diego's half: steps up to $380,000
  • Total basis: $760,000

If Elena sells for $760,000:

  • Capital gain: $0
  • Federal tax: $0
  • Arizona income tax: $0
  • Total tax: $0

Tax savings: about $52,500

Which Property Qualifies

Community Property

Property acquired during marriage using community funds (wages, salary, business income) qualifies for the double step-up:

  • The family home
  • Investment property bought during marriage
  • Brokerage and investment accounts funded during marriage
  • Business interests built during marriage

What Does NOT Qualify

Separate Property. Property owned before marriage, or received by gift or inheritance during marriage, is separate property under A.R.S. 25-213. Only the decedent's share steps up.

Joint Tenancy. Property held in joint tenancy rather than as community property steps up only on the decedent's share. This is why how a deed is titled matters for the surviving spouse.

Retirement Accounts. Traditional IRAs, 401(k)s, and 403(b)s are income in respect of a decedent. They do not receive a basis step-up, and beneficiaries owe ordinary income tax on withdrawals. Inherited retirement accounts are often the most heavily taxed assets in an estate.

Lifetime Gifts. If someone gives you an appreciated asset before death, you take their original basis under IRC Section 1015. This carryover basis means the built-in gain follows the asset. Holding an asset until death, so it passes with a stepped-up basis, usually leaves your heirs a smaller tax bill than gifting it during life.

Survivorship Title and Beneficiary Deeds

How you title Arizona real property decides both whether it avoids probate and how the basis steps up. Two Arizona tools come up most often.

Community property with right of survivorship. A.R.S. 33-431 lets a married couple hold real property as community property with right of survivorship. The whole asset passes to the surviving spouse at death, and because it stays community property, both halves step up under IRC Section 1014(b)(6). A deed that instead says "joint tenants with right of survivorship" avoids probate the same way, but it steps up only the decedent's half. Read the exact wording on the current deed before you assume which rule applies, and see the Arizona community property guide for how title language changes the transfer path.

Beneficiary deeds. Arizona lets an owner record a beneficiary deed under A.R.S. 33-405 that transfers real property to a named beneficiary at death without probate. Because the transfer happens at the owner's death, the beneficiary takes the property with a basis stepped up to fair market value at the date of death under IRC Section 1014. A beneficiary deed on community property held by spouses can pair with the double step-up when the property keeps its community character. The Arizona beneficiary deed guide walks through recording and revocation.

Arizona Capital Gains Tax

Arizona does not have a separate capital gains rate. It taxes capital gains as ordinary income at its flat 2.5% individual income tax rate under A.R.S. 43-1011, the rate the Arizona Department of Revenue applies to all individual filers.

Because the gain is taxed as ordinary income, a step-up lowers both your federal and your Arizona tax when you sell inherited property. If an estate or trust earns income during administration, that income may require an Arizona fiduciary income tax return (Form 141AZ) in addition to federal Form 1041.

No Arizona Estate or Inheritance Tax

Arizona has no state estate tax and no state inheritance tax. The Arizona Department of Revenue confirms the state repealed its estate tax and levies no inheritance or gift tax.

This shapes how you think about the step-up. In Arizona the step-up is about income tax on future capital gains, not about avoiding a state death tax, because the state does not levy one. Federal estate tax reaches only estates above the federal exclusion ($15,000,000 for deaths in 2026), so it affects very few families.

Step-Up vs. Step-Down

The adjustment works both ways. If property has lost value since purchase, the basis steps down to the lower value at death.

Example:

  • Stock purchased for $100,000
  • Worth $60,000 at death
  • Heir's basis: $60,000

If the heir sells for $60,000, there is no loss to deduct. The built-in loss disappeared at death.

Planning tip: If an asset has a built-in loss, it may be better to sell it before death so the loss can be used for tax purposes.

Alternate Valuation Date

For a large estate that owes federal estate tax, the executor may elect to value assets six months after death rather than at the date of death (IRC Section 2032). The election is allowed only if it decreases both the gross estate and the federal estate tax. Because it applies only to estates above the federal exclusion, this election rarely reaches Arizona families.

Documentation to Keep

To support a step-up, keep records that show:

1. Community Property Character

  • Marriage certificate
  • Date of acquisition (during marriage)
  • Source of funds (community income)
  • The deed or title showing how the property was owned

2. Fair Market Value at Death

  • A real estate appraisal as of the date of death
  • Brokerage statements
  • The probate inventory
  • Professional valuations for business interests

3. Records That Prove Appreciation

  • The death certificate
  • Original purchase documents
  • Valuations at death

Impact on Estate Planning

Trust Planning

Property transferred to a revocable living trust keeps its community property character. The double step-up still applies when the first spouse dies.

Keep Community Property as Community Property

Converting community property to separate property can cost the surviving spouse the double step-up. Confirm how appreciated assets are titled before making changes.

Intentional Basis Planning

  • Hold appreciated assets until death so they receive the step-up
  • Consider selling assets with a built-in loss before death
  • Document the community property character so the step-up is easy to support

Frequently Asked Questions

Does Arizona have a double step-up in basis?

Yes. Arizona is a community property state under A.R.S. 25-211, so under IRC Section 1014(b)(6) both halves of community property receive a stepped-up basis when the first spouse dies, not just the decedent's half.

Does Arizona tax the capital gain when I sell inherited property?

Arizona taxes capital gains as ordinary income at its flat 2.5% individual income tax rate (A.R.S. 43-1011). A step-up lowers the taxable gain, so selling at the stepped-up value produces little or no Arizona taxable gain.

Does Arizona have an estate or inheritance tax?

No. Arizona has no state estate tax and no state inheritance tax. The Arizona Department of Revenue confirms the state repealed its estate tax and levies no inheritance or gift tax.

Does a home that passes by Arizona beneficiary deed still get the step-up?

Yes. Property transferred at death by a recorded beneficiary deed under A.R.S. 33-405 passes at the owner's death, so the beneficiary takes it with a basis stepped up to fair market value at the date of death.

Does joint tenancy get the double step-up in Arizona?

No. Property held in joint tenancy rather than as community property steps up only on the decedent's share. The double step-up under IRC Section 1014(b)(6) applies to community property.

What if I received the property as a gift before death?

Lifetime gifts take a carryover basis under IRC Section 1015, not a stepped-up basis. Only property transferred at death receives the step-up under IRC Section 1014.

Related Guides

Sources:

Last Updated: July 2026. Tax rules are complex and change frequently. This guide provides general information. Consult a tax professional or estate planning attorney for advice specific to your situation. It is not legal advice.