When one spouse dies, the surviving spouse’s cost basis in the family home changes. How much it changes depends on how the two of them held title — and in California the difference between two common ways of holding is enormous.
The rule
Under IRC §1014(b)(6), community property receives a 100% step-up at the first death, provided at least half of it is includible in the decedent’s gross estate. Both halves reset to date-of-death value — the decedent’s half and the survivor’s half.
Property held in joint tenancy with right of survivorship gets a step-up on the decedent’s half only. The survivor’s half keeps its original basis.
One detail worth stating because it worries people: §1014(b)(6) applies “whether or not the estate must file a return.” You do not need a taxable estate, and you do not need to file Form 706, for the community property step-up to work.
The IRS publishes the arithmetic
Publication 523 gives the example directly. A home with a $50,000 original basis and a $100,000 fair market value at the date of death:
| How title was held | Survivor’s new basis |
|---|---|
| Joint tenancy with right of survivorship | $75,000 |
| Community property | $100,000 |
On those numbers the gap is $25,000 of basis. Scale it to a Bay Area house bought decades ago and the same structure produces a gap in the high six figures — taxed, if the survivor sells, at capital gains rates plus California’s ordinary income treatment plus potentially the 3.8% net investment income tax.
This is frequently the largest single number in a surviving spouse’s sale, and it was decided years earlier by how a deed was drafted.
Why it lands the way it does
Joint tenancy is a familiar, convenient way to hold title, and it does avoid probate. Plenty of California couples were put into it by a title company or a form deed without anyone raising the basis consequence. It is not a mistake anyone made carelessly — it is a default that carried a tax cost nobody was told about.
California also recognises community property with right of survivorship, which is intended to give both the probate avoidance and the full step-up. Whether a particular deed achieves that is a question for an estate attorney looking at the actual document, not something to assume.
What a survivor should do about it
First, find out how title is actually held before assuming either outcome. The deed says. Recollection frequently does not match it.
Second, establish the date-of-death value properly. Whatever the step-up percentage, it is applied to a number, and that number needs to be defensible years later when the house sells. A retrospective appraisal or a documented broker opinion of value prepared close to the date of death is worth far more than a printout from a portal pulled three years afterwards. I prepare these for estates and their advisers.
Third, note that it interacts with the §121 exclusion, and the two together often reduce the taxable gain to very little. A surviving spouse also gets the full $500,000 exclusion if the sale closes within two years of the date of death under §121(b)(4) — and can tack the late spouse’s ownership and use with no time limit under §121(d)(2). Those are separate provisions doing separate jobs.
None of this is a reason to hurry a decision. It is a reason to get the valuation documented early, so the choice stays open. The surviving spouse walkthrough lays out which deadlines are real and which are not.