Even if you don't live in a community property state, upon the first death 1/2 the house gets a step-up in basis and the other 1/2 gets a step-up on the second death. That eliminates even more of the "lost" $250K tax break. In a community property state you get the WHOLE house stepped up in basis at first death and again at the second death.If you didn't get this step-up in basis the heirs would have to not only pay 50% Estate tax, but 20% Capital Gains tax. If you both live and then sell at more than a $500K profit you'll just have to pay the tax---( :>(. ed
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