Community Property, Taxes, and the Market for Local Assets: Evidence from Farmland

Job Market Paper

Abstract

Whether surviving spouses owe $50,000 or $250,000 in federal capital gains taxes when selling inherited marital property can depend on which side of a state line they live. The federal tax code allows for the basis of inherited assets to be 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, while in the nine community property states, a full step-up in basis for marital assets is applied. This difference translates into substantial tax savings and reduced transaction costs for surviving spouses in community property states. We develop a dynamic model of household hold/sell decisions and show that in local asset markets, quantity is unambiguously greater under community property relative to common law while the difference in price is ambiguous. Using 289,724 farmland parcel sales from 2018–2025, our geographic border discontinuity reveals a robust 14% discount for forest lands and a less-robust 30% premium for pasture in community property states, relative to their common law neighbors.

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