The community property step-up in basis resets both halves of an asset to market value when one spouse dies (IRC Section 1014(b)(6)), but leaving the US removes most of its value. A nonresident alien generally owes no US tax on selling US stock, and India ignores the reset. US real estate is the exception.
How the community property step-up in basis works
Both halves reset at the first death
Basis is the figure you subtract from a sale price to find your gain, and death usually resets it to market value on that date (IRC Section 1014(a)). In a community property state, the reset covers both halves of the asset, not just the deceased spouse's half. That's often called the double step-up.
The condition that decides it
The survivor's half qualifies only if at least half of the whole community interest sits in the deceased spouse's gross estate. For a nonresident alien, the US estate reaches US situs assets only, such as a US home or a US brokerage account. An asset in India stays outside it.
Inclusion has a price. A nonresident alien's estate gets a $60,000 exemption on US situs assets and pays up to 40% above it, and a community property survivorship agreement doesn't change that. A non-citizen survivor can defer the tax only through a QDOT.
What the step-up is worth after you leave the US
US stock: it saves you nothing
Once you're a nonresident alien, the US generally doesn't tax your gains on US stock, unless you spend 183 days or more in the US in the tax year (IRC Section 871(a)(2)). A basis reset can't shrink a tax you don't owe.
I wouldn't hold US stock for the sake of the step-up. Holding it exposes the deceased spouse's half to estate tax, and the prize is an income tax saving you don't have. Compare that with Irish-domiciled ETFs on estate exposure, and check your Indian status before you sell anything.
US real estate: where it still pays
A nonresident alien who sells US real estate owes US tax on the gain under FIRPTA, and the buyer's default withholding is 15% of the price, not of the gain. That's why FIRPTA withholding bites hardest when your basis is low. A reset basis is the cleanest way to lower it.
A Texas townhouse shows the effect, assuming Arjun's death comes after the family has moved to India.
Worked example: Meera and Arjun's townhouse
- Purchase price: $310,000
- Market value when Arjun dies: $780,000
- Gain without the step-up: $780,000 minus $310,000 = $470,000
- Meera's basis after the step-up: $780,000, so a sale at that price shows $0 gain
- Federal tax avoided: up to $94,000, which is 20% of $470,000 at the top long-term rate
Why India ignores the step-up
India ignores the US reset. An inherited asset takes the previous owner's cost under Section 49(1) of the Income-tax Act, 1961, and under section 73 of the Income-tax Act, 2025, which applies from 1 April 2026.
If India taxes the sale, as it does for a resident and ordinarily resident on worldwide gains, the gain runs from the original purchase price. Whether India taxes it at all depends on your status that year, and the RNOR cost basis reset is a separate lever from the US step-up.
Who this applies to
The rule covers property you and your spouse acquired during marriage while domiciled in a community property state: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. IRS Publication 555 lists them and explains the basis rule.
Four situations change the answer:
- Property you owned before the marriage, or received as a gift or inheritance, generally stays separate and gets no double step-up.
- Spouses who hold property jointly outside those states get a step-up on half, because only half of a qualified joint interest is in the estate.
- A non-citizen survivor keeps the step-up, since the statute has no citizenship test, but loses the unlimited marital deduction without a QDOT.
- A US citizen or green card holder who survives keeps the full value after the move, because the US keeps taxing their worldwide gains.
What to do before you leave
Work through these in order:
- List every asset with its purchase date, cost and title, and note which state you lived in when you bought it.
- Leave community titling alone unless a lawyer in that state confirms in writing that a change keeps the full step-up.
- Skip last-minute gifts of appreciated assets to your spouse, because the reset is denied when the asset passes back to the donor within one year of death (IRC Section 1014(e)).
- Decide US stock on its own merits rather than for the step-up.
- Keep a date-of-death appraisal for any US home, so the new basis is documented.
Your first move this month
Before you change any titling, list your community property assets and their costs, then have an attorney in your state confirm the plan. I'd do that before booking the flight, because a hasty retitle is hard to undo after the first death. InvestMates can check the US and India sides together.
Frequently asked questions
What is the step-up basis loophole?
The step-up basis loophole is the rule that inherited assets take a new basis equal to market value at death, so the gain built up during the owner's life is never taxed. In community property states the rule resets both spouses' halves.
The rule applies by default, so you don't have to claim it.
What assets do not qualify for a step-up in basis?
Retirement accounts such as a 401(k) or traditional IRA don't qualify, because they're income in respect of a decedent. A 401(k) withdrawal strategy replaces step-up planning for those accounts.
Assets you gave away during life keep the donor's cost. The surviving spouse's separate property gets no reset either.
Does a joint account get a step-up in basis when one spouse dies?
Yes, but usually on half. When spouses hold a joint brokerage account with right of survivorship, only half is in the deceased spouse's estate (IRC Section 2040(b)), so only that half resets. A community property account can reset in full if at least half is in the estate.
Does community property stay community property after I move to India?
Property you acquired as community property while domiciled in a community property state generally keeps that character after you move, but that state's law governs the details. Get a written opinion from an attorney there before you retitle anything. The US estate tax rules for non-citizens still apply to your US situs assets.