Houston Estate Planning and Elder Law Attorney Blog
When a married Texan dies, the federal tax basis of the property the couple owned is recalculated, and Texas’s community property system changes how much of that property gets the new figure. For a surviving spouse deciding whether to sell a Houston home or a long-held brokerage account, the result can be that decades of appreciation never enter the gain calculation. The rule is federal, but it depends on Texas marital property law to work.
Under 26 U.S.C. § 1014, property acquired from a person who has died takes a basis equal to its fair market value on the date of death. Section 1014(b)(6) extends that treatment to the surviving spouse’s own half of community property, so both halves of a community asset take the date-of-death value rather than only the half that belonged to the spouse who died. McCulloch & Miller, whose founding partner is both an attorney and a CPA, builds this rule into the estate planning it does for Houston couples and into the advice it gives surviving spouses.
How the Step-Up in Basis Works for Community Property in Texas
Basis is the figure against which taxable gain or loss is measured when property is sold, generally starting from what the owner paid for it.
Consider a hypothetical couple who bought a Houston house as community property for $200,000 and who still own it when one spouse dies, at a time when it is worth $700,000. Under § 1014(b)(6), both halves take the $700,000 value as their new basis. If the surviving spouse sells soon afterward for about that price, there is little or no gain to report. Section 1014(b)(6) applies only to community property, which is why the result differs for couples in states that do not use the community property system.
The date-of-death value is the default. Where alternate valuation is elected under 26 U.S.C. § 2032, § 1014(a)(2) uses the value at that later valuation date instead.
The statute attaches one condition to the surviving spouse’s half. At least one-half of the whole community interest in the property must have been includible in determining the value of the decedent’s gross estate. The test is inclusion in the gross estate, not whether any estate tax was actually owed.
What Counts as Community Property in Texas
Texas law defines the category broadly. Under Family Code § 3.002, community property consists of the property, other than separate property, acquired by either spouse during marriage. Separate property, under § 3.001, is property owned before marriage, property acquired during marriage by gift, devise, or descent, and certain personal injury recoveries.
Section 3.003 presumes that property either spouse possesses during marriage is community property, and a spouse claiming otherwise must prove separate character by clear and convincing evidence. In practice, that presumption often places the family home and investment accounts built during the marriage on the community side.
Call (713) 333-8900 to schedule a consultation at the firm’s Houston office.
When the Basis Adjustment Works Against the Family
The adjustment runs in both directions. Section 1014(a)(1) sets the new basis at fair market value on the date of death, so property worth less than it cost takes a lower basis, and a loss the couple could have claimed during life is lost.
Separate property is treated differently. The deceased spouse’s separate property passes from the decedent and receives an adjusted basis, while the surviving spouse’s own separate property does not pass from the decedent at all and keeps its original basis.
The statute also blocks one tempting maneuver. Under § 1014(e), appreciated property given to a person within one year before that person’s death, which then passes back to the giver or the giver’s spouse, keeps the decedent’s old basis rather than a new one.
Recording Date-of-Death Values After the First Spouse Dies
The benefit of a basis adjustment depends on being able to show the date-of-death value when the property is eventually sold, sometimes many years later. An appraisal of real estate and statements showing account values near the date of death are far easier to assemble in the first months after a death than to reconstruct a decade on. The same records often serve double duty in the probate of the first spouse’s estate, where McCulloch & Miller helps surviving spouses in Harris County gather them once rather than twice.
Questions Texas Surviving Spouses Ask About Basis
Does the Estate Have to Owe Estate Tax for the Adjustment to Apply?
No. Section 1014(b)(6) requires that at least one-half of the community interest be includible in the decedent’s gross estate. It does not require that any estate tax be owed.
Does the Surviving Spouse’s Separate Property Get a New Basis?
No. The surviving spouse’s separate property does not pass from the decedent, so § 1014 does not adjust it. Only the decedent’s property and the survivor’s half of community property are covered.
Can Property Be Given to a Dying Spouse to Capture a New Basis?
Generally not. Under § 1014(e), appreciated property given to someone within one year before death that passes back to the giver or the giver’s spouse keeps the decedent’s adjusted basis.
Planning for the Basis Rules Before and After a Death
How property is titled and characterized during a marriage shapes what a surviving spouse inherits for tax purposes, and those choices are easiest to make while both spouses are living. After a death, the priority shifts to documenting values promptly. Call (713) 333-8900 or contact McCulloch & Miller online and the firm will schedule a time to talk.