Double Step-Up in Basis: Why Community Property Beats Joint Tenancy.

A couple buys a duplex in Mesa in 2006 for $300,000, rents it for twenty years, and writes off $200,000 of depreciation along the way. The husband dies in 2026 with the property worth $1,300,000. His widow sells three months later and owes zero federal tax on the sale. Move the same couple and the same duplex to a common-law state, put the deed in joint tenancy, and that sale costs $147,800. Nothing changed but which state's marital property law the deed was written under.

Start with the ordinary rule. IRC §1014(a)(1) gives property acquired from a decedent a basis equal to its fair market value on the date of death. That covers the decedent's own property. Spouses holding a rental as joint tenants get exactly half of the benefit: §2040(b) treats a qualified joint interest between spouses as one-half includible in the decedent's gross estate, and §1014(b)(9) gives stepped-up basis to what the gross estate includes. The survivor's half keeps its old basis, depreciation and all.

Section 1014(b)(6) is the exception, and it exists for community property alone. It reaches "property which represents the surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State," provided at least one-half of the whole community interest was includible in the decedent's gross estate. Read that twice. The survivor's half is not inherited from anyone. She already owned it, she still owns it, and the statute steps it up anyway. Includible is not the same as taxable, either. With the federal estate and gift tax exemption at $15 million per person for 2026, almost nobody owes estate tax, and the step-up does not care.

The depreciation is the part people miss. Twenty years of write-offs normally come back at sale as unrecaptured §1250 gain, taxed at up to 25%. Death wipes out the half riding on the decedent's share and leaves the survivor's half exposed, which is where $25,000 of that $147,800 comes from. Under community property none of it survives. That is the cleanest version of avoiding depreciation recapture on a rental, and the price of admission is a correctly worded deed.

The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, the same list the IRS works from in Publication 555. Living in one is not enough on its own. Property titled in joint tenancy is joint tenancy even in California, and joint tenancy is not community property, so a deed can talk you out of §1014(b)(6) while you are standing in the right state. California closed the most common version of that gap in 2001 by adding community property with right of survivorship at Civil Code §682.1, which delivers probate avoidance and the full step-up together. Arizona, Idaho, Nevada, Texas, Washington, and Wisconsin offer the same vesting; Louisiana and New Mexico handle survivorship differently. Pull every deed and brokerage statement and read the title line. It is a fifteen-minute job with a six-figure number attached.

This is the question I get most in Utah, and the answer is better than clients expect. An asset acquired as community property in Arizona or California does not convert into something else because the couple moved. Character attaches when the property is acquired and it travels with the property. Utah put that in writing in 2012, when S.B. 168 was signed on March 16 and enacted the Uniform Disposition of Community Property Rights at Death Act at Utah Code Title 75, Chapter 2b. It preserves community property rights acquired before the move and, at death, treats half as the survivor's and half as the decedent's. Roughly fifteen states have adopted a version of it. Section 1014(b)(6) turns on the character of the property, not on the mailing address at death, so the double step-up should still be there.

The weak point is proof. Ten years after a move, sold and rebought inside a joint account at a new brokerage, community property looks exactly like everything else on the statement. Keep the closing documents from the community property state, keep the account titled in a way that shows what it is, and sign a written community property agreement while both spouses are alive. The step-up is only as good as the file you can hand an examiner.

Alaska started this in 1998, and Tennessee in 2010, South Dakota in 2016, Kentucky in 2020, and Florida in 2021 followed. All five let a married couple, including nonresidents who appoint a qualified in-state trustee, move assets into a community property trust and elect community property treatment, aimed squarely at §1014(b)(6). The appeal for a Utah couple sitting on a low-basis position they intend to hold until death is obvious. So is the risk. In Commissioner v. Harmon, 323 U.S. 44, decided in 1944, the Supreme Court refused to respect Oklahoma's elective community property regime for federal tax purposes because it was consensual, not "dictated by State policy, as an incident of matrimony." Harmon was an income-splitting case rather than a basis case, and the modern statutes are drafted with it in mind. The IRS has still never ruled on whether these trusts earn the double step-up. My read: the position is reasonable and worth taking when the built-in gain is large, and it is not something to build a plan around if losing it would break the plan.

One trap applies no matter which route you take. Section 1014(e) shuts the step-up off entirely for appreciated property the decedent received by gift within one year of death, if that property then passes back to the donor or the donor's spouse. It takes the decedent's adjusted basis instead of fair market value. Funding a community property trust with a healthy spouse's low-basis stock after the other spouse gets a terminal diagnosis is the exact fact pattern the subsection was written to stop. These structures work when they are set up years early and boring, not when they are set up in a hurry.