How to sort sprites in a 2d isometric game

I'm making a 2d isometric game and I'm running into a problem with sorting sprites. For all my objects in the scene i set their z position equal to their y position and then on any characters that can move around i make their z position always equal to their y via update so they are correctly positioned in front of or behind objects. This works fine if the object a character is moving around has a flat base (i.e. a line along the y axis), however in isometric most things have a diagonal base and this method does not work.

An illustration of the problem can be seen here in this similar question: http://answers.unity3d.com/questions/1136534/how-to-calculate-sorting-order-around-diagonal-obj.html