What is a stepped-up basis, and why does community property matter?

A stepped-up basis resets an inherited asset’s tax basis to its fair market value at the owner’s death, potentially reducing future capital gains tax when the asset is sold. In a common-law state, only the deceased spouse’s share of jointly owned property generally receives the adjustment. In a community property state, both halves of a community asset may receive a step-up in basis (sometimes called a double step-up in estate planning), which can significantly reduce or even eliminate capital gains tax if the surviving spouse later sells the asset.