Community Property Step-Up in Basis: The Double Step-Up

The Short Answer

A step-up in basis resets the cost of an inherited asset to its value on the date of death, which is what capital gains are measured against when it is later sold. In most of the country, when one spouse dies only that spouse’s half of jointly owned property is stepped up. Community property is different: both halves are stepped up.

That difference is worth real money. It means the surviving spouse in a community property state can sell the family home or a long-held stock position shortly after the first death and owe little or no capital gains tax, because the entire asset’s basis was refreshed, not half of it.

What the Double Step-Up Is

Compare the two systems side by side. Say a married couple bought an asset together and it has appreciated a lot since:

• Common law state: only the deceased spouse’s half steps up to date-of-death value. The surviving spouse’s half keeps its original cost, so selling can trigger capital gains tax on that half’s appreciation.
• Community property state: both halves step up to date-of-death value. The surviving spouse’s basis in the whole asset becomes its current value, so an immediate sale produces little or no taxable gain.

The phrase “double step-up” simply captures that a community property state steps up two halves where a common law state steps up one.

The Rule: IRC 1014(b)(6)

The general step-up lives in Internal Revenue Code Section 1014. The community property twist is subsection 1014(b)(6). It treats the surviving spouse’s one-half share of community property as though it, too, passed from the deceased spouse, so it also receives a new basis, provided at least half of the whole community interest was includible in the deceased spouse’s gross estate.

Community property meets that condition, because the deceased spouse’s half is includible in their estate. That is the mechanism behind the double step-up. IRS Publication 551, Basis of Assets, states the same result: the basis of both the deceased spouse’s and the surviving spouse’s halves of community property is generally the fair market value at the date of death.

California Example

A married couple in California buys stock together for $200,000. It is worth $600,000 when the first spouse dies. Here is how the basis lands under each system:

The California surviving spouse can sell for $600,000 with no capital gain. In the common law state, the surviving spouse’s own half still carries its $100,000 original cost, so a $600,000 sale leaves a $200,000 taxable gain. See the full step-up in basis guide for how the calculation works on other assets.

Which States Have Community Property

Nine states use a community property system: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Married couples in these states get the double step-up on their community property. A handful of other states let couples opt into community property treatment through a special community property trust, which can extend a similar benefit; a tax advisor can tell you whether that applies where you live.

Some community property states also allow a title called community property with right of survivorship, which combines two benefits: the property passes to the surviving spouse without probate, and it still receives the full double step-up. Our state transfer guides cover how property is titled and transferred in each state.

What It Does Not Cover

The double step-up is powerful but narrow. It does not apply to:

• Separate property. Assets one spouse owned before marriage or received by gift or inheritance are usually separate property, not community property, and only step up when that spouse dies.
• Retirement accounts. Traditional IRAs and 401(k)s never get a step-up, in any state, because they are income in respect of a decedent. See our inherited IRA guide.
• The second death. The double step-up happens at the first spouse’s death. When the surviving spouse later dies, their assets step up again to that later value for the next generation.

Because the character of an asset (community, separate, or jointly held) drives the result, and because state rules differ, it is worth confirming the treatment of a specific asset with a professional before you sell.