The community property step-up in basis lets a surviving spouse in Arizona reset the tax cost of both halves of a couple’s community assets to their value at the first death. In practice, that can erase decades of built-up capital gain before the survivor ever sells. The catch is that the rule only works when the asset truly counts as community property, and a few words on a deed can change that.
This is one of the most overlooked pieces of estate planning for Arizona families. Below is how the rule works, how Arizona’s survivorship title protects it, which assets never qualify, and the mistakes that quietly cost couples the benefit.
How Does Community Property Step-Up in Basis Work
At the first death, the entire community asset takes its fair market value as its new basis, including the half the surviving spouse already owned. Under IRS Publication 555, the rule applies as long as at least half of the community interest counts in the deceased spouse’s gross estate, whether or not the estate has to file an estate tax return.
In a common-law state, spouses who own property jointly usually get a reset on only the deceased spouse’s half. The survivor’s half keeps its original cost. That difference is where the savings come from.
Community Property Step-Up in Basis on a Tucson Home
Take a couple who bought a home for $200,000. When the first spouse dies, the home is worth $600,000.
- Held as community property. The whole home takes a $600,000 basis. If the survivor sells for $600,000, the taxable gain is $0.
- Held as joint tenancy. Only the deceased spouse’s half steps up, to $300,000. The survivor’s half keeps its $100,000 cost, for a total basis of $400,000. A $600,000 sale leaves $200,000 of taxable gain.
Arizona starts its income tax with your federal adjusted gross income, so the step-up removes that gain from your Arizona return too. One Arizona detail still matters later: the state’s 25% capital gains subtraction only covers assets acquired after December 31, 2011, and for inherited assets Arizona uses the date the original owner bought them. If the couple bought before 2012 and the value keeps climbing after the death, that later gain misses the subtraction.
Community Property With Right of Survivorship in Arizona
Arizona law lets married couples title property in a way that keeps its community character and passes it straight to the survivor without probate. A.R.S. § 33-431 authorizes the arrangement, and the deed has to say “community property with right of survivorship” in so many words.
Because the property stays community property, both halves still step up at the first death. Here is how the common Arizona titling choices compare:
- Community property with right of survivorship. Both halves step up, and the survivor takes the property automatically.
- Community property without survivorship. Both halves step up, but the deceased spouse’s half may need probate or another court process to transfer.
- Joint tenancy with right of survivorship. The property skips probate, but only the deceased spouse’s half steps up.
- A revocable living trust. A trust drafted to hold community property can keep that character, avoid probate at both deaths, and cover assets a deed cannot reach.
Two limits are worth knowing. Either spouse can end the survivorship feature by recording an affidavit, so the title can change without both spouses signing. And a survivorship deed only handles the first death. After the survivor dies, the property needs its own plan to pass cleanly to the children, which is why many families pair the deed with a trust. Our guide to funding a trust in Arizona covers how assets actually get into one.
What Assets Do Not Qualify for a Step-Up in Basis
Retirement accounts are the biggest exception. Traditional IRAs, 401(k)s, and 403(b)s carry untaxed income, so they never get a new basis, and beneficiaries pay ordinary income tax on what they withdraw. Federal tax rules also treat IRAs as separate property, so the community rule does not reach them. Our guide to What Happens to My IRA When I Die explains how those accounts pass instead.
A few other assets miss the reset:
- Untaxed growth inside a nonqualified annuity. The deferred gain stays taxable to whoever inherits the contract.
- Gifts made during life. Someone who receives an appreciated asset as a gift takes over the giver’s original basis.
- The survivor’s separate property. Property that belonged only to the surviving spouse does not change basis when the other spouse dies.
- Certain gifts made within a year of death. The one-year rule below shuts off the reset in specific cases.
What Are Common Mistakes With Stepped-Up Basis
The most common error is a title that quietly turns community property into something else.
- Joint tenancy on the home or brokerage account. It feels like the natural married-couple choice and costs half the reset.
- Moving to Arizona without addressing what you brought. Assets a couple acquired while living in a common-law state generally do not become community property just because the couple moved here. Arizona has no statute spelling out how courts treat those assets at death, so the result depends on the facts. A written community property agreement can convert them, which puts them in line for the full reset.
- Mixing separate and community money without records. Blended accounts make it hard to prove which dollars qualify.
- Retitling without advice. A refinance, a new account, or a lender’s paperwork can switch the title to joint tenancy without anyone noticing.
- Skipping a date-of-death valuation. The survivor needs an appraisal or statement showing the value at death to use the new basis later.
- Gifting appreciated assets late in life. A gift passes along the old basis, while an asset held until death usually leaves heirs a smaller tax bill.
What Is the Step-Up in Basis One-Year Rule
It blocks the reset when someone gives appreciated property to a person who dies within a year, and the property then passes back to the giver or the giver’s spouse.
Suppose a son gives his father stock with a $50,000 basis that is now worth $250,000. The father dies eight months later and leaves the stock back to the son. Because the gift came back within a year, the son keeps the original $50,000 basis instead of a $250,000 one. The same rule can catch spouses who move separate property to a seriously ill spouse, expecting it to return with a new basis.
What Is the 6-Month Rule for Step-Up Basis
An estate can choose to value its assets six months after the date of death instead of on the date itself. The election only applies when it lowers both the total value of the estate and the estate tax owed, so it matters mainly for estates that owe federal estate tax. Most families use the date-of-death value.
Frequently Asked Questions
Do We Need to File an Estate Tax Return to Get the Step-Up
No. The IRS applies the community property reset whether or not the estate has to file a return, as long as at least half of the community interest belongs in the deceased spouse’s gross estate.
Does an Inherited House Get a Step-Up in Basis
Generally yes. A home you inherit takes its value at the owner’s death as your basis. For an Arizona couple holding the home as community property, the surviving spouse’s half resets too. A surviving spouse who sells within two years of the death may also qualify to exclude up to $500,000 of gain, if the couple met the ownership and use tests before the death and the survivor has not remarried.
Is Stepped-Up Basis Going Away
As of September 2026, the step-up remains part of federal tax law. Lawmakers have floated limits in past years, and none has become law.
Does Arizona Have an Estate Tax
No. Arizona charges no estate or inheritance tax. Our guide to Retiring in Arizona: A 2026 Tax Guide covers the rest of the state’s rules for retirees.
How We Coordinate Basis Planning at Global Investment Strategies
We have worked with Tucson families since 2009. Your attorney drafts the deeds, trusts, and property agreements, and your CPA handles the returns and valuations. Our role is making sure the titles on your accounts and property match what those documents intend.
That work starts with an inventory: how you hold title to each home, brokerage account, and business interest today, which assets arrived from another state, and where joint tenancy has crept in. From there, we line up the changes with your attorney and CPA so the full step-up is available when your family needs it.
Review the Titles on Your Home and Accounts
A deed signed years ago, or an account opened in a hurry, can decide how much capital gain your spouse inherits. Checking takes far less time than fixing it after a death.
We work with families across Tucson, Oro Valley, Marana, and the Catalina Foothills. Request a private conversation and we will check whether your titles protect the community property step-up in basis, working alongside your attorney and CPA.
Global Investment Strategies provides educational planning concepts and works alongside your qualified legal, tax, and financial professionals. This article is educational and is not individualized tax, legal, or financial advice. Tax rules described here reflect federal and Arizona law as of September 2026 and change over time. Review any titling or estate planning change with your attorney and CPA before acting.
