When clients come to us with questions about capital gains tax after inheriting property, one of the most common misconceptions involves the “step-up in basis.” Many Texans assume that all jointly owned property automatically receives a full step-up at death. The reality is more nuanced. Whether you receive a full or partial basis adjustment depends largely on how the property is owned and who owns it.
This article explains how the step-up in basis works for property held as joint tenants with right of survivorship (JTWROS) in Texas and why proper titling can make a significant difference in your tax outcome.
The “basis” of property is generally what you paid for it. When someone dies, the tax law under Internal Revenue Code § 1014 typically adjusts the basis of property included in that person’s taxable estate to its fair market value on the date of death.
This matters because capital gains tax is calculated based on:
Sale Price – Adjusted Basis = Taxable Gain
A higher basis means less taxable gain if the property is sold later.
Joint tenancy with right of survivorship is a form of ownership where:
While survivorship determines who inherits the property, it does not determine how much of the property receives a step-up in basis. That is controlled by federal tax law and depends on ownership classification.
If the co-owners are not married (for example, siblings, business partners, or a parent and child), only the deceased owner’s share receives a step-up.
Two siblings purchase a property for $200,000 and hold title as JTWROS. Each owns 50%.
Result:
Total new basis for survivor = $300,000, not $400,000.
If the survivor later sells for $400,000, taxable gain is $100,000.
Texas is a community property state, which changes the analysis significantly.
If married spouses own property as community property, then at the death of the first spouse:
Both halves of the property receive a step-up in basis.
That means the survivor’s half also adjusts—even though they were already the owner of that half.
Married couple purchases property for $200,000 (community property).
Result: Entire property basis becomes $400,000.
If the surviving spouse sells for $400,000 shortly after, there is no capital gain.
Even in a community property state like Texas, a spouse can still have some separate property. For example, anything they bring into the marriage, or any property a spouse receives after marriage by gift or inheritance, is deemed separate property.
If a married spouse owns a piece of property as separate property, and his basis in the property is $400,000. He then retitles it so that he and his wife own as joint tenants with rights of survivorship. At the death of the husband, the property is worth $500,000.
All the property receives a step-up in basis, since the deceased spouse owned 100% of the property as his separate property, even though he retitled it as joint tenants with right of survivorship.
But what if the wife passes away first, when the property is worth $500,000? There is no step-up in basis, as the wife didn't have a community property interest in the property. If the husband later sells the property for $500,000, there will be a gain of $100,000 that will need to be reported.
The difference between a full and partial step-up can mean tens or hundreds of thousands of dollars in capital gains tax.
Improper titling is especially common with:
Even financially sophisticated individuals often assume survivorship language automatically provides optimal tax treatment. It does not.
When evaluating jointly owned property, consider:
These factors can change both inheritance mechanics and tax consequences. However, you have to be careful as well that when titling assets that you don't defeat the purpose of your overall estate plan. For example, you may own a parcel of real estate as your separate property, because you received that residence or tract of land as an inheritance or gift from a parent or a deceased spouse. If your intention is to pass that property to your children, and not to a second marriage spouse, then you should not consider ownership as joint tenants with right of survivorship. If you do that, then the second marriage spouse will receive the property rather than your children. You should always consult with a trusted advisor, such as your attorney, when thinking about titling of assets, especially in blended family situations.
In Texas, a full step-up in basis is not automatic for joint tenancy property.
The step-up in basis is one of the most valuable tax advantages in estate planning, but it only works optimally when assets are structured correctly. Titling decisions that seem minor today can have major financial consequences for heirs later.
If you want to confirm whether your property ownership is optimized for both probate avoidance and tax efficiency, a review of your asset titles is an excellent place to start.
Howell Legacy Planning helps families structure ownership and estate plans designed to minimize taxes, streamline administration, and preserve wealth for future generations. If you’d like a personalized review of your asset titling and estate plan, contact Gary Howell to schedule a consultation.
Estate Planning and Probate Attorney located in Houston, Texas. Contact our office for a free consultation regarding your particular needs.
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