Step-Up in Basis

Imagine parents bought a home for $100,000 decades ago that is now worth $700,000. If they sell during life, they may owe capital gains tax on the $600,000 of appreciation. If their child inherits the home and sells it shortly after death for $700,000, the basis is stepped up to $700,000 and there is no taxable gain.

Because Arizona is a community property state, both halves of community property get a full step-up at the first spouse's death. In common-law states, only the deceased spouse's half steps up. This makes properly characterized community property especially valuable for surviving spouses.

Retirement accounts (traditional IRAs, 401(k)s) and annuities do not receive a step-up. Lifetime gifts also do not get a basis adjustment; the recipient takes the giver's original basis. Holding appreciated assets until death is often more tax-efficient than gifting them during life.

The double step-up depends on property being properly characterized as community property with right of survivorship under A.R.S. 33-431.

For the broader context of how the step-up in basis interacts with federal estate, gift, and GST tax planning for Arizona families, read our pillar guide: Estate, Gift & GST Tax in Arizona: The Complete Guide.