Community Property and the Double Step-Up in Basis

What community property is

In California, property acquired by either spouse during marriage while living in the state is generally community property, owned equally by both. Property owned before marriage, or received during marriage by gift or inheritance, is generally separate property, along with what it produces, so long as it is kept separate.

Most of the attention community property receives is about divorce. Its effect at death is less discussed, and for a household with long-held, appreciated assets it can be the more valuable one.

The double step-up

When someone dies, qualifying assets included in their estate generally receive a new income tax basis equal to fair market value at the date of death. A basis adjustment to fair market value at death can substantially reduce or eliminate capital gains attributable to appreciation before death when the asset is later sold. The actual tax result depends on the asset, its valuation, applicable exclusions and subsequent changes in value.

For married couples, the question is how much of an asset is treated as passing from the spouse who died. For property held in joint tenancy, the adjustment often applies to the deceased spouse's ownership interest, and the survivor's interest keeps its original basis. For qualifying community property, Internal Revenue Code section 1014(b)(6) generally allows both spouses' shares to receive the adjustment, provided the statutory requirements are satisfied. Separate property owned entirely by the deceased spouse and included in their estate may receive an adjustment on the entire asset rather than a portion of it.

A general summary of federal treatment. Results depend on the facts, the records and the legal character of each asset. Confirm with your CPA and estate attorney.

How title affects it

How a deed or account is titled does not by itself determine whether property is community property under California law, but it affects how readily that character can be established, and the analysis looks to state law and the record.

Many married couples hold real estate and brokerage accounts as joint tenants, often because it was the default at closing or account opening. Joint tenancy generally provides survivorship rights, but the income tax basis consequences depend on the property's actual legal character and applicable documentation. Property titled in joint tenancy may not qualify for the full community property basis adjustment unless its community character can be established. California also permits community property with right of survivorship, which combines survivorship rights with community property ownership.

California's community property rules can be complex, particularly for property acquired during marriage but titled in joint tenancy. The date of acquisition, source of funds, marital agreements and applicable legal presumptions may affect characterization. An attorney should determine the legal ownership status before any tax basis conclusions are reached.

Changing how property is titled can affect ownership rights, creditor exposure, estate planning and tax treatment. Retitling decisions should be reviewed with a California estate planning attorney and a qualified tax professional rather than made on the strength of a general article.

Revocable trusts

Transferring community property into a revocable living trust generally does not change its character if the trust document is drafted to preserve it. Many California trusts include language identifying community and separate property and providing that each keeps its character inside the trust.

That makes the trust document and its schedule of assets part of the basis question. A trust that was drafted carefully but never funded leaves assets titled however they were titled before, which is one more reason funding matters, as covered in who handles trust funding in California. Trust drafting is the attorney's work; an advisor can help track which accounts are titled to the trust and how.

Character, records and moves

• Commingling. Separate property mixed with community funds can become difficult to trace, and untraceable property may be treated as community. Records of contributions and sources matter.
• Agreements. Spouses can change the character of property by agreement, but in California a transmutation generally requires an express written declaration. Informal understandings generally do not qualify.
• Blended families. Property brought into a second marriage is often separate property, and its character affects both basis and who ultimately receives it.
• Moves into California. Property acquired while living in a non-community property state may be treated as quasi-community property under California law, but it is generally not treated as community property for the federal basis rule.
• Moves out of California. Community property generally keeps its character after a move, though how the new state treats it at death varies.

What it does not apply to

The basis adjustment applies to assets such as real estate, brokerage accounts and closely held business interests. Traditional IRAs, tax-deferred retirement accounts and the taxable portion of inherited annuity benefits generally do not receive a basis adjustment that eliminates income tax at death. Those assets are subject to separate beneficiary and income tax rules. Roth accounts, after-tax contributions and annuity contract basis may receive different tax treatment depending on the circumstances, since some annuities contain after-tax principal that is not taxed again when distributed.

For many households, tax-deferred accounts are a large share of total assets, so the basis advantage applies to only part of the estate.

The adjustment also works in both directions. An asset worth less than its basis at death generally steps down to its date-of-death value, and community treatment extends that to both shares as well. With the federal estate tax exemption now high enough that most California estates owe no estate tax, as covered in what the 2026 exemption changes, income tax basis has become the more relevant tax question for many families.

How Avinci approaches it

Avinci Wealth Management is a Registered Investment Adviser registered in California, Arizona, Illinois, Texas, and Nevada, firm CRD #327780, headquartered at 23929 Valencia Blvd, Suite 404 in Santa Clarita, with additional offices in Beverly Hills and Woodland Hills. When providing investment advisory services, Avinci Wealth Management is subject to its fiduciary obligations under applicable investment adviser law.

Avinci serves clients in Manhattan Beach and the South Bay through our Beverly Hills office and by secure video meetings. For households weighing a 401(k) rollover, Social Security timing, or the first years of withdrawals, Avinci acts as financial advisor and financial consultant, coordinating those decisions with tax planning modeled alongside the household's own CPA.

Through the Retirement Blueprint planning process, how each account is titled and where cost basis sits may be gathered as part of the financial picture, so that questions about community character and title can be raised with the client's estate attorney and CPA rather than discovered after a death. Legal determinations are made by the attorney. Founder Lindahl Lucas is involved in overseeing the development of Retirement Blueprint planning.

Avinci receives advisory fees for investment advisory services. Separately, insurance and annuity products may be offered through our affiliated insurance agency, Lucas Insurance Services, which may receive commissions from issuing insurance companies. This compensation arrangement creates a conflict of interest and is disclosed in our Form ADV.