They Bought the Rental in 1988 for $110,000. The Day the First of Them Dies, Both Halves Will Reset to What It’s Worth That Morning, Because of a Tennessee Trust They’ll Sign Without Ever Leaving Ohio
A single trust document, signed in Ohio, could legally erase decades of capital gains tax baked into a rental property, but the IRS has never blessed it and one Supreme Court precedent hangs over every couple who tries.
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A community property trust can give Ohio couples a double step-up in basis on rental property. If you bought a rental for $110,000 in 1988, one trust document could wipe out most of the capital gains tax built into that property. When the first spouse dies, the trust’s assets are split for tax purposes: one half is treated as the deceased spouse’s share and the other half as the surviving spouse’s share, but the trust can remain revocable if its term allows.
In Ohio, a jointly owned rental normally gets only half a step-up. When one spouse dies, that spouse’s share takes a new basis equal to fair market value at the date of death. The survivor’s half keeps its original cost. If the survivor sells, they owe tax on all appreciation in their own half.
Both Halves Reset When the First Spouse Dies
Community property gets different treatment, since the tax code treats the survivor’s half as if it also came from the spouse who died, so the whole asset takes a fresh basis. A rental bought for $100 and worth $200 when the first spouse dies leaves $50 of gain taxable if held jointly. Held in a community property trust, it leaves no tax, and the property gets another full step-up when the second spouse dies.
Home values raise the stakes, as prices tracked by the Case-Shiller National Home Price Index reached 337.3 in July 2026, up 1.9% from a year earlier.
Where the Rule Lives in Federal and Tennessee Law
The federal rule is 26 U.S.C. §1014(b)(6). It covers the surviving spouse’s one-half share of community property held under community property laws of any State, as long as at least half is includible in the gross estate of the spouse who died. Estates of people who die in 2026 have a basic exclusion amount of $15,000,000.
Tennessee became the second state to let couples opt into community property through a trust in 2010. Its requirements appear in Tenn. Code Ann. §35-17-103. Alaska went first in 1998, and Florida’s version covers trusts created on or after July 1, 2021. Alaska, Florida, Kentucky, South Dakota, and Tennessee let nonresidents use their trusts.
Couples Who Benefit and Couples Who Gain Nothing
This works for married couples who own appreciated assets: low-basis investment real estate, appreciated stock, and closely held business interests. Both spouses must sign the trust. Retirement accounts, IRAs, and life insurance gain nothing. Couples in mandatory community property states already have the rule. Assets that have lost value reset too, which lowers their basis.
How Ohio Couples Set One Up
- Hire an estate attorney who knows Tennessee’s act and can work with a Tennessee trust company.
- Draft a trust that expressly declares it a Tennessee community property trust and opens with the statutory warning in capital letters about your rights during your marriage and at divorce. Both spouses sign.
- Name a qualified trustee. Tennessee requires an in-state trustee or authorized trust company whose duties include keeping records and arranging tax returns. Either spouse or both can serve as trustee.
- Consider putting the Ohio rental in an LLC owned by the trust. Real estate outside the trust’s state may not qualify as community property. An LLC membership interest counts as intangible property, making it more likely to be treated as community property.
- When the first spouse dies, order a date-of-death appraisal to document the new basis.
IRS Silence and Other Traps Before You Sign
The IRS has not tested its position on these trusts when nonresidents create them. The biggest legal risk is Commissioner v. Harmon, 323 U.S. 44 (1944), where the Supreme Court refused to honor elective community property for federal income tax purposes. Supporters say modern trust statutes are different, but no court has ruled on them.
Creditor protection shrinks because each spouse’s half becomes reachable by that spouse’s creditors, eliminating the tenancy-by-the-entirety shield. Divorce rights change as well. When the first spouse dies, one-half of all assets in the trust become irrevocable. If the IRS rules against these trusts, you would lose the survivor-half step-up, but the deceased spouse’s half would still reset under the standard rule.
A community property trust is one tool among many, and it only pays off when the rest of the estate paperwork lines up behind it. We put the full checklist, beneficiary forms, and titling included, in a free estate guide here.
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David Beren has been a Flywheel Publishing contributor since 2022. Writing for 24/7 Wall St. since 2023, David loves to write about topics of all shapes and sizes. As a technology expert, David focuses heavily on consumer electronics brands, automobiles, and general technology. He has previously written for LifeWire, formerly About.com. As a part-time freelance writer, David’s “day job” has been working on and leading social media for multiple Fortune 100 brands. David loves the flexibility of this field and its ability to reach customers exactly where they like to spend their time. Additionally, David previously published his own blog, TmoNews.com, which reached 3 million readers in its first year. In addition to freelance and social media work, David loves to spend time with his family and children and relive the glory days of video game consoles by playing any retro game console he can get his hands on.
