Yes, because it is an equal and undivided interest, all community property receives a basis step-up upon the death of the first spouse. You will enter the fair market value on the date of his death as the basis. If there is a loss, you would not be required to report it. Why do you think it looks suspicious enough to trigger an audit? There are losses reported and realized everyday, Keep the records to prove the value in case you get audited.
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