The situation is different if you live in a community property state.
In a community property state only ½ of the community property is included in the decedent spouse’s estate. However, the entire community property asset gets a step-up (or down) to FMV at the date of death. Community property rules only apply to a husband and wife legally married under state law.
Example: Carmen and Electra are husband and wife. They live in Wisconsin (a community property state). Electra just died. They owned a home (community property) valued at $500,000 as of Electra’s date of death.
Solution: $500,000 – they are married, they live in a community property state, so Carmen gets a full step-up in basis upon his spouse’s death.
The community property states are: Arizona, California,Idaho,Louisiana,Nevada,New Mexico,Texas,Washington, Wisconsin.
This is discussed in IRS publication http://www.irs.gov/pub/irs-pdf/p555.pdf, whch says, in part:
Death of spouse.
If you own community property and your spouse dies, the total fair market value (FMV) of the community property, including the part that belongs to you, generally becomes the basis of the entire property.For this rule to apply, at least half the value of the community property interest must be includible in your spouse's gross estate, whether or not the estate must file a return (this rule does not apply to registered domestic partners).
Answers are correct to the best of my ability but do not constitute legal or tax advice.
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