They’ve Owned the House Together in California Since 1984. When He Dies, Community Property Law Will Reset the Basis on Both Halves, Not Just His, and She Can Sell It the Next Month With Almost No Gain
A California couple buys a modest house in 1984, watches it grow into a seven-figure asset, and then one spouse dies. What happens next to the tax bill surprises most surviving spouses who assume decades of appreciation will cost them…
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Many California couples who bought modest houses in 1984 never left, and four decades of appreciation turned those starter homes into seven-figure assets, and the surviving spouse often assumes a sale means a large capital gains bill.
If the house is community property, the community property step-up in basis resets both halves of the home at the first spouse’s death, wiping out most of the gain. National prices sit at a record, with a leading home-price index at 337.3 in July 2026, so the dollars involved keep growing.
How Both Halves Get a Fresh Starting Point
Basis is the number the IRS deducts from your sale price to figure taxable gain. For a home, it starts with the purchase price plus improvements. Under 26 U.S.C. § 1014(a), property acquired from a decedent takes a basis equal to its fair market value on the date of death. People call that reset a step-up.
The community property provision sits in 26 U.S.C. § 1014(b)(6), which treats the surviving spouse’s one-half share of community property as acquired from the decedent, as long as at least half of the whole community interest is includible in the decedent’s gross estate. IRS Publication 523 says that when either spouse dies, “the total fair market value of the community property becomes the basis of the entire property, including the part belonging to the surviving spouse”, whether or not the estate has to file a return.
What a Common Law State Leaves on the Table
For a jointly owned home in a common law state, only the deceased spouse’s half resets, and the survivor’s half keeps its old basis (IRS Publication 523). Here’s an example illustration: assume the house cost $100,000, was worth $1.5 million at death, and sold for that amount soon after.
| Ownership | Basis After Death | Gain on Sale |
|---|---|---|
| Community property | $1,500,000 | $0 |
| Joint tenancy, common law state | $800,000 | $700,000 |
| No reset at all | $100,000 | $1,400,000 |
Selling costs and any price change after death adjust these figures. That’s why the community property survivor ends up with almost no gain, rather than exactly zero.
Who Qualifies and Who Gets Left Out
The IRS lists nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The home must actually be community property. Property one spouse owned before the marriage or inherited generally counts as separate property.
Title matters too, as California couples who hold title as joint tenants may get a step-up only on the deceased spouse’s half. California also offers community property with right of survivorship, which pairs the full step-up with automatic transfer to the survivor.
Many retirees have left California. Community property acquired while you lived there generally keeps that character after a move, and some common law states adopted the Uniform Disposition of Community Property Rights at Death Act to recognize it at death. A few common law states let couples opt in through a community property trust, and Tennessee is one of them. Whether the IRS accepts the double reset for these trusts is less clear.
Steps That Secure the Full Reset
- Pull the deed and read the vesting line, which shows how title is held.
- If the home is held in joint tenancy but was bought with community funds, ask an estate attorney licensed in your state whether retitling makes sense.
- After a death, order an appraisal as of the date of death. If no estate tax return is required, IRS guidance points to the appraised value at the date of death.
- Check the home-sale exclusion. A surviving spouse who sells within 2 years of the death and hasn’t remarried may exclude up to $500,000, compared with $250,000 for a single filer under 26 U.S.C. § 121(b). After a double reset, the exclusion often goes unused. In the joint tenancy example, it would still leave $200,000 of taxable gain.
Resets Cut Both Ways
Section 1014(a) resets basis to fair market value, whichever direction that moves it. If a community asset is worth less than its basis at death, both halves step down, and the survivor loses any built-in loss she could have deducted. The rule covers the total value of the community property, so a community brokerage account also resets in full. Gains vanish on the winners, and losses vanish on the losers. Before anything else, pull the deed and confirm how title is actually held.
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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.
