New Mexico Step-Up in Basis: Double Step-Up

New Mexico'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 New Mexico families make better decisions about how they own 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 New Mexico 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 is also treated 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 New Mexico 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.

New Mexico 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 New Mexico Is Different

New Mexico is a community property state. Property acquired during marriage with community funds is owned by both spouses together, and New Mexico Statutes (NMSA 1978) Section 40-3-8 defines that community property. Because both spouses are treated as owning the whole of community property, the entire asset is brought into the deceased spouse's estate for step-up purposes, not just half.

The Tax Savings

Scenario	Original Basis	Value at Death	Stepped-Up Basis	Gain if Sold
Common-law state (joint tenancy)	$200,000	$1,000,000	$600,000	$400,000
New Mexico (community property)	$200,000	$1,000,000	$1,000,000	$0

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

Detailed Example

Maria and Robert, New Mexico residents, bought a home in 1995 for $180,000. By 2026 it is worth $780,000. Robert dies.

In a Common-Law (Separate Property) State

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

Maria's half: keeps its original basis of $90,000
Robert's half: steps up to $390,000
Total basis: $480,000

If Maria sells for $780,000:

Capital gain: $300,000
Federal tax at 15%: $45,000
New Mexico income tax (rates up to 5.9%): as much as $17,700
Total tax: about $62,700

In New Mexico

Because the home is community property:

Maria's half: steps up to $390,000
Robert's half: steps up to $390,000
Total basis: $780,000

If Maria sells for $780,000:

Capital gain: $0
Federal tax: $0
New Mexico income tax: $0
Total tax: $0

Tax savings: about $62,700

Which Property Qualifies

Community Property

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

Primary residence
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. 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.

New Mexico Capital Gains Tax

New Mexico does not have a separate capital gains rate. It taxes capital gains as part of personal income at its graduated rates of 1.5% to 5.9%, with the top rate applying to taxable income over $210,000 for a single filer (NMSA 1978 Section 7-2-7, as restructured by Laws 2024, ch. 67, effective January 1, 2025).

Because the gain is taxed as ordinary income, a step-up lowers both your federal and your New Mexico tax when you sell inherited property. If an estate or trust earns income during administration, that income may require a New Mexico fiduciary income tax return (Form FID-1) in addition to federal Form 1041.

No New Mexico Estate or Inheritance Tax

New Mexico has no state estate tax and no state inheritance tax. The former New Mexico estate tax was tied to the federal state death tax credit, and it phased out for deaths on or after January 1, 2005. A New Mexico estate tax return is filed only when a federal Form 706 must be filed for another reason, and the state then issues a certificate of no tax due.

This matters for how you think about the step-up. In New Mexico 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. Our guide on New Mexico and the federal estate tax explains the exclusion, portability, and how community property changes what counts in the gross estate.

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 New Mexico 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 New Mexico have a double step-up in basis?

Yes. New Mexico is a community property state under NMSA 1978 Section 40-3-8, 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 New Mexico tax the capital gain when I sell inherited property?

New Mexico taxes capital gains as part of personal income at its graduated rates of 1.5% to 5.9% (NMSA 1978 Section 7-2-7). A step-up reduces the taxable gain, so selling at the stepped-up value produces little or no New Mexico taxable gain.

Does New Mexico have an estate or inheritance tax?

No. New Mexico has no state estate tax and no state inheritance tax. Its former estate tax was a federal-credit pickup tax that ended for deaths on or after January 1, 2005.

Do retirement accounts get a step-up in New Mexico?

No. Traditional IRAs and 401(k)s are income in respect of a decedent, so they do not receive a basis step-up. Beneficiaries owe ordinary income tax on withdrawals.

Does joint tenancy get the double step-up?

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.

Sources

New Mexico Statutes (NMSA 1978) Section 40-3-8 (Community Property)
Internal Revenue Code Section 1014 (Basis of Property Acquired from a Decedent)
Internal Revenue Code Section 1014(b)(6) (Community Property)
Internal Revenue Code Section 1015 (Basis of Property Acquired by Gift)
Internal Revenue Code Section 1223(9) (Holding Period of Inherited Property)
Internal Revenue Code Section 2032 (Alternate Valuation)
NMSA 1978 Section 7-2-7 (New Mexico Individual Income Tax Rates), as amended by Laws 2024, ch. 67
New Mexico Taxation and Revenue Department, Personal Income Tax Rates, https://www.tax.newmexico.gov/all-nm-taxes/current-historic-tax-rates-overview/personal-income-tax-rates/
IRS Publication 551 (Basis of Assets)

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.