Step-Up in Basis in Washington State: The Community Property Double Advantage

The step-up in basis is one of the most powerful tax mechanisms in American estate law, and Washington's status as a community property state amplifies it considerably. While heirs in most states receive a stepped-up basis only on the assets they actually inherit, Washington surviving spouses can receive a stepped-up basis on assets they already owned — the other half of the community property — without inheriting anything at all.

This "double step-up" can eliminate hundreds of thousands of dollars in capital gains tax for a surviving spouse who understands and properly documents it.

What the Step-Up in Basis Does

Under Internal Revenue Code Section 1014, when a person dies, the cost basis of their capital assets is reset to the fair market value on the date of death.

If the decedent purchased stock for $80,000 thirty years ago and it is worth $900,000 at death, the heirs inherit the stock with a $900,000 basis. If they immediately sell it for $900,000, their taxable capital gain is zero. The $820,000 of built-in appreciation is permanently forgiven by federal tax law.

This applies to any asset subject to capital gains treatment: individual stocks, mutual funds, exchange-traded funds, investment real estate, business interests, and other appreciated capital assets. It does not apply to assets held in tax-deferred accounts (Traditional IRAs, 401(k)s) — those accounts are subject to income tax on withdrawal, not capital gains treatment.

The Single Step-Up in Common Law States

In most states, only the decedent's half of jointly owned assets receives the step-up. A surviving spouse in a common law state who jointly held an investment portfolio with the decedent would receive a stepped-up basis only on the decedent's 50% of the portfolio. The surviving spouse's 50% retains the original purchase price basis.

If the couple jointly purchased stock for $100,000 and it is worth $500,000 at death, the survivor's half ($50,000 value) retains the $50,000 original purchase basis. If they sell all the stock for $500,000, they owe capital gains tax on the $200,000 gain attributable to their half ($250,000 proceeds minus $50,000 basis = $200,000 gain, approximately).

Washington's Double Step-Up: How It Works

Washington is one of nine community property states in the U.S. Under IRC Section 1014(b)(6), when a spouse in a community property state dies, both halves of all community property receive a step-up in basis to the date-of-death fair market value — not just the decedent's half.

Using the same example: a couple in Washington jointly held stock purchased for $100,000 that is worth $500,000 when the first spouse dies. The entire $500,000 receives a stepped-up basis — both the decedent's $250,000 half and the surviving spouse's $250,000 half. If the surviving spouse sells all the stock immediately for $500,000, their capital gain is zero. The entire $400,000 of appreciation is forgiven.

In common law states, the surviving spouse would owe capital gains tax on approximately $200,000. In Washington, they owe nothing.

What Qualifies as Community Property

Community property is property acquired by either spouse during the marriage with marital labor or marital funds. In Washington, there is a legal presumption that property acquired during marriage is community property unless there is clear evidence otherwise.

Separate property — which does not receive the double step-up — includes:

• Property owned by either spouse before the marriage
• Property received during the marriage by gift or inheritance (as long as it was not commingled with community funds)
• Income from separate property if the couple has agreed to keep it separate

The key risk: separate property that is commingled with community property — for example, an inheritance deposited into a joint checking account used for household expenses — can become community property over time. Commingling is difficult to reverse and requires clear documentation to disentangle.

The Community Property Agreement and Its Effect on Probate

Many Washington married couples sign a Community Property Agreement, a contract that typically declares all current and future property to be community property and specifies that at the first spouse's death, all community property vests immediately in the surviving spouse.

When a valid Community Property Agreement is in place, community property bypasses the probate process entirely — it transfers to the surviving spouse by operation of the agreement, without court involvement.

Critical caution: Assets that pass under a Community Property Agreement still bypass probate, but they do not bypass the Washington estate tax gross estate calculation. The full value of the community property is included when determining whether the estate meets the estate tax filing threshold. An executor relying on a Community Property Agreement to avoid probate may still face the Washington estate tax filing obligation.

Documenting the Step-Up: Why This Step Cannot Be Skipped

The IRS does not automatically adjust cost basis records when a person dies. Heirs and executors must take affirmative steps to establish the date-of-death fair market value:

For publicly traded securities: Date-of-death values are calculated using the average of the high and low trading prices on that date. Brokerage firms can typically provide a formal date-of-death valuation statement for inherited accounts.

For real estate: A formal appraisal by a licensed real estate appraiser is the gold standard. The appraisal should be dated as close to the date of death as possible and reflect the actual market conditions on that date. Some executors use comparative market analyses (CMAs) for smaller estates, but a formal appraisal provides stronger documentation if the DOR or IRS audits the estate.

For business interests and non-publicly-traded securities: A professional business valuation by a Certified Valuation Analyst (CVA) or Certified Public Accountant is required. Business valuations are complex and can take several weeks to complete.

Failing to document the date-of-death values creates problems years later when heirs sell the assets. Without a defensible record, the IRS may use the original purchase price as the basis, triggering capital gains that the step-up should have eliminated.

Washington's Capital Gains Excise Tax and the Step-Up Interaction

Washington imposes a 7% capital gains excise tax on gains from sales of stocks, bonds, and certain business interests exceeding the annual standard deduction ($278,000 for 2025). Real estate is explicitly exempt.

The federal step-up at death effectively immunizes most estate asset sales from this tax as well. If an executor sells the decedent's stock portfolio within months of death, the date-of-death basis and the sale price are nearly identical — the recognizable gain is minimal, typically well below the $278,000 threshold.

The Washington capital gains excise tax becomes relevant for assets held inside the estate for extended periods after death, or for trusts that continue to hold assets and periodically sell them at gains.

The Surviving Spouse's Next Steps

To take full advantage of the double step-up, the surviving spouse should:

1. Commission a date-of-death appraisal for all real estate, closely held business interests, and hard-to-value assets within 60 days of death.
2. Obtain date-of-death statements from brokerages and financial institutions for all investment accounts.
3. Update the cost basis records with financial institutions. Many brokerages have a formal process for updating inherited account bases upon receipt of the death certificate and a valuation statement.
4. Document the community property character of all assets — particularly for assets with unclear separate vs. community property status — to establish that the double step-up applies.

The double step-up in basis is one of Washington's most significant financial benefits for surviving spouses. The Washington Final Tax & Estate Tax Guide includes the documentation sequence for establishing date-of-death values and properly claiming the community property step-up, alongside the estate tax and probate filing requirements that run in parallel.

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