Joint tenancy with right of survivorship property gets a partial or full step-up in basis when one owner dies, and the size of the JTWROS step-up in basis depends on who the co-owners are and where they live. A married couple in a common law state gets a 50% step-up. A married couple whose property qualifies as community property gets a 100% step-up on the entire asset. Non-spouse joint tenants (a parent and child, two siblings) fall under a different rule that can produce anywhere from a partial to a full step-up depending on what each owner contributed to the purchase.
The stepped-up portion resets to fair market value on the date of death. Whatever the survivor eventually sells the property for above that new basis is the taxable capital gain.
Married Couples in Common Law States
For spouses who are the only two owners of JTWROS or tenancy-by-the-entirety property, IRC Section 2040(b) treats the property as 50% included in the estate of the first spouse to die, no matter which spouse paid for it.1Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests That included half receives a step-up to fair market value at the date of death. The surviving spouse’s other half keeps its original cost basis.
No contribution tracking is required. It doesn’t matter whether one spouse earned all the money or the couple split every payment. The tradeoff for that simplicity is a hard cap: a married couple holding JTWROS property in a common law state can never get more than a 50% step-up, even if the deceased spouse paid for the entire thing.
The math on a home bought for $400,000 and worth $1,000,000 at the first spouse’s death: the decedent’s half steps up from $200,000 to $500,000, the survivor’s half stays at $200,000, and the combined new basis is $700,000. A sale at $1,000,000 produces a $300,000 long-term capital gain, taxed at 0%, 15%, or 20% depending on the survivor’s income.
Non-Spousal Joint Tenants and the Contribution Rule
Non-married joint tenants operate under a very different default. IRC Section 2040(a) includes the entire value of the jointly held property in the deceased owner’s gross estate unless the surviving owner can prove they contributed their own funds toward the purchase.1Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests Full inclusion is the starting point, and the burden of proving otherwise sits with the executor.2eCFR. 26 CFR 20.2040-1 – Joint Interests
Basis follows inclusion. Whatever percentage lands in the decedent’s estate steps up to fair market value under Section 1014(b)(9). The survivor’s proven contribution keeps its original cost basis.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent That produces a counterintuitive result: a survivor who cannot prove any contribution gets a bigger step-up than one who documents paying half.
Same $400,000-to-$1,000,000 home, but held by a parent and child. If the child cannot prove contributing any funds, the full $1,000,000 is included in the parent’s estate and the entire property steps up. Child sells immediately, zero gain. If the child can document paying exactly half, only $500,000 is included and stepped up. The child’s original $200,000 basis on their half stays, combined basis is $700,000, and a sale at $1,000,000 produces a $300,000 gain.
The federal estate tax exemption is $15,000,000 in 2026, so most estates won’t owe any estate tax regardless of how much is included.4Internal Revenue Service. What’s New – Estate and Gift Tax For most families, full inclusion actually helps the survivor: bigger step-up, no estate tax bill. The contribution rule only creates a painful tradeoff for estates large enough to exceed the exemption.
What Counts as the Survivor’s Contribution
The survivor’s contribution includes funds they can trace to the purchase price from their own earnings, savings, or separate assets. Mortgage payments count. When both joint tenants deposited earnings into a joint account that funded the down payment and mortgage, the survivor’s contribution is proportional to their share of the deposits.5eCFR. 26 CFR 20.2056A-8 – Special Rules for Joint Property Money the survivor received as a gift from the decedent doesn’t count, even if the survivor then used those funds to pay toward the property.
One exception to the 100% inclusion default: if the property was itself acquired as a joint tenancy by gift, inheritance, or bequest, each owner is treated as owning a fractional share. Two siblings who inherited a home as joint tenants each own half, and only the decedent’s 50% goes into the estate.1Office of the Law Revision Counsel. 26 USC 2040 – Joint Interests
Community Property Spouses Get a Full Step-Up
Married couples whose property qualifies as community property get the best outcome. Under IRC Section 1014(b)(6), the surviving spouse’s half of community property is treated as if it were also acquired from the decedent. As long as at least half the community interest was includible in the decedent’s gross estate, the entire property, both halves, receives a step-up to fair market value.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
On that same $400,000 home now worth $1,000,000, the entire basis resets to $1,000,000 when the first spouse dies. The survivor can sell immediately with zero taxable gain. IRS Publication 555 confirms this: “the total fair market value of the community property, including the part that belongs to you, generally becomes the basis of the entire property.”6Internal Revenue Service. Publication 555 (12/2024), Community Property
Community property is the default treatment for assets acquired during marriage in nine states:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Here is where people trip up. Holding property as joint tenants with right of survivorship in a community property state doesn’t automatically make it community property. Some states treat property titled as JTWROS between spouses as separate property, which drops the couple back to the 50% step-up rule. The IRS notes that in community property regimes, spouses holding property as joint tenants may have each interest characterized as separate rather than community.7Internal Revenue Service. 25.18.1 Basic Principles of Community Property Law Couples in these states should verify how their deed is titled and whether state law requires specific “community property with right of survivorship” language to preserve the full step-up.
Opt-In Community Property States
Alaska, Tennessee, and South Dakota let married couples elect community property treatment through special trusts or agreements, but the federal tax treatment remains genuinely uncertain. IRS Publication 555 explicitly states it “doesn’t address the federal tax treatment of income or property subject to the ‘community property’ election” in these states.6Internal Revenue Service. Publication 555 (12/2024), Community Property Whether such property qualifies for the full step-up under Section 1014(b)(6) hasn’t been definitively resolved. Couples using these opt-in trusts should get advice from a tax professional who understands the unresolved position before counting on a full basis reset.
Rental Property: Step-Up Erases Depreciation Too
If the JTWROS property was a rental, the step-up wipes out prior depreciation on the portion included in the estate. Under Section 1014(b)(9), the new basis is fair market value at death, reduced by any depreciation the survivor claimed on their own share before the death. The decedent’s share resets completely, meaning depreciation previously claimed on that portion is effectively forgiven.3Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
The survivor then starts a new depreciation schedule on the stepped-up portion. The stepped-up value of the building (land is never depreciable) becomes the new depreciable basis, and a fresh 27.5-year or 39-year recovery period begins at the date of death. The survivor’s retained portion continues on its existing schedule.
The step-up also eliminates depreciation recapture on the stepped-up portion. When the survivor sells later, the IRS cannot tax previously claimed depreciation on the decedent’s share as ordinary income under Section 1250 recapture, because the step-up erased those deductions from the basis calculation.
Documenting the New Basis
The stepped-up basis is only as good as the paperwork supporting it. The controlling number is the value that would be reported on federal estate tax return Form 706, even if the estate is too small to require filing.8Internal Revenue Service. Instructions for Form 706 Under the $15,000,000 exemption, most estates don’t file a 706, but the surviving owner still needs to establish fair market value as though one were being prepared.
For real estate, that means a professional appraisal dated as close to the date of death as possible. Residential appraisals typically run $200 to $750 depending on complexity and location. An appraisal obtained years later, or an estimate pulled from an online tool, gives the IRS grounds to challenge the basis. Keep a file containing:
- A certified copy of the death certificate establishing the date of death
- A professional appraisal by a qualified appraiser, dated near the death
- Contribution records (bank statements, closing documents, mortgage payment records) showing who paid what, which is critical for non-spousal joint tenancies
- A basis calculation worksheet showing how the stepped-up portion and retained portion combine
For financial accounts held in JTWROS, brokerage firms typically provide a date-of-death valuation statement. Request it promptly. Reconstructing account values years later can be difficult.
Creating a Joint Tenancy Is a Gift
One separate point worth flagging, because it’s often confused with the inheritance rules above. Adding a non-spouse as a joint tenant on property you already own is a taxable gift equal to half the property’s current fair market value (assuming either party can sever the interest).9Internal Revenue Service. Instructions for Form 709 On a $500,000 home, that’s a $250,000 gift.
If the gift exceeds $19,000 in a calendar year (the annual exclusion for 2025 and 2026), you must file IRS Form 709, the federal gift tax return.10Internal Revenue Service. Gifts and Inheritances Filing doesn’t mean you owe tax. The excess above $19,000 reduces your $15,000,000 lifetime exemption, and actual gift tax kicks in only after you exhaust the entire lifetime amount. Transfers between spouses are exempt from gift tax entirely under the unlimited marital deduction, so adding a spouse as a joint tenant carries no gift tax consequence.