Community Property Double Step-Up

Both halves of community property are revalued at the first death

Section 1014(b)(6) treats as acquired from the decedent the surviving spouse's one-half share of community property held under the community property laws of any state, if at least one-half of the whole community interest was includible in the decedent's gross estate. Because the decedent's own half is also covered by section 1014, the entire property takes its fair market value at death.

Publication 551 puts it plainly: when either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property, whether or not the estate must file a return. Its example: community property with an $80,000 basis worth $100,000 at death gives the survivor a $50,000 basis in their half and the heirs a $50,000 basis in the other half.

The general step-up rules, including the consistency rule and the alternate valuation date, are on the step-up in basis page.

Spouses in other states get a step-up on half only

Publication 551 says one-half of a qualified joint interest, property held by spouses as tenants by the entirety or as the only joint tenants with right of survivorship, is included in the first spouse's estate. The survivor's basis is the cost of their own half, reduced by the depreciation they were allowed, plus the stepped-up basis of the half they inherited.

For rental property this difference is large, because the survivor's own half still carries its share of decades of depreciation. In a community property state the same property is revalued in full and the survivor starts a fresh depreciation schedule on the whole building.

Couples who own outside the nine states can still get a full step-up at the second death, when the survivor's whole interest is included in their estate. The portability page covers sheltering the first estate.

A worked example: a California apartment building at the first death

Hypothetical, round numbers. A married couple domiciled in California bought a small apartment building as community property in 1990 for $400,000. After depreciation their adjusted basis is $150,000, and the building is worth $2,000,000 when one spouse dies in 2026.

Under section 1014(b)(6), the survivor's basis in the whole property is $2,000,000. If the survivor sells for that price, there is no gain and none of the old depreciation is taxed. If the same couple had held the building as joint tenants in a common law state, the survivor's basis would be $75,000 for their own half plus $1,000,000 for the inherited half, or $1,075,000, and a $2,000,000 sale would produce a $925,000 gain.

Run your own numbers with your CPA, and confirm the date-of-death value with an appraisal, since that value is the survivor's new basis and the starting point for new depreciation.

Title, trusts and moves decide whether the property is still community property

Publication 555 says the law of the state where you are domiciled determines whether you have community property. Property acquired during marriage while domiciled in a community property state is generally community property; money earned while domiciled in a noncommunity property state is separate property. Spouses can also convert community property to separate property by an agreement valid under state law, which gives up the double step-up for that asset.

Publication 555 states that it does not address property subject to the opt-in community property elections under Alaska, Tennessee and South Dakota law, so the federal treatment of those arrangements is not settled in IRS guidance. Couples who moved from a community property state, or who hold community property in a revocable trust, should have an attorney confirm that the property is still community property under the governing state law before relying on section 1014(b)(6).

Section 1014 still needs the property to be included in the gross estate. Under Rev. Rul. 2023-2, assets moved by completed gift into an irrevocable grantor trust outside the estate get no step-up at all.

How the double step-up changes the exchange decision

For an older couple in a community property state, a 1031 exchange before the first death defers tax that a death may then erase entirely. Exchanging out of a management-heavy building into passive replacement property, such as interests in a Delaware statutory trust, keeps the deferral while the couple waits; the traditional DST exchange page describes the structure.

After the first death, the survivor may be able to sell with little or no gain, and a further exchange may not be needed. The 1031 versus holding for the step-up guide and the elderly parent options guide work through the timing.