Community Property, Taxes, and the Market for Local Assets

Abstract

State-defined marital property regimes affect how federal capital gains taxes are applied to surviving spouses. The federal tax code allows for the basis of inherited assets to be “stepped-up” (increased) to the value at the time of the decedent’s death. In the 41 common law states, surviving spouses receive a partial basis adjustment for the deceased spouse’s share of the assets (typically half). In contrast, in the nine community property states, a full step-up in basis for marital assets is applied. In all states, a full adjustment is made after the surviving spouse’s death. This difference translates into substantial tax savings and reduced transaction costs for surviving spouses in community property states, often hundreds of thousands of dollars. We begin by describing the legal context of marital property regimes in the United States. Then, using a geographic border discontinuity paired with nationwide farmland transaction data, we consider the effects of state-defined marital property regimes on parcel-level prices and county-level turnover rates. Preliminary results for the upper Midwest are not indicative of a ``jump’’ in farmland prices due to community property; however, there are indications of a negative spatial gradient of farmland prices associated with community property within 40km of the border.

Hinds, A., N. Miller, and A. Shew. "Community Property, Taxes, and the Market for Local Assets." [Manuscript available upon request]