Capital gains tax on jointly owned property is calculated and paid by each co-owner separately, on their own share of the gain. Your share depends on how the deed is written, what percentage you own, and whether the property was your primary home. Two people selling the same house can walk away with very different tax bills.
How the Deed Determines Your Share of the Gain
The legal structure on the deed controls how you divide proceeds and basis at sale.
- Tenancy in common. Owners can hold unequal shares such as 70/30 or 60/40. Each person reports the percentage of proceeds and basis that matches their interest.
- Joint tenancy with right of survivorship. Owners hold equal shares. Two co-owners each report 50% of the gain.
- Tenancy by the entirety. Available only to married couples in certain states. Split equally and typically reported on one joint return.
- Community property. In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, property acquired during a marriage is presumed 50/50 between spouses.1Internal Revenue Service. Publication 555 (12/2024), Community Property
For a married couple filing jointly, the structure matters less on the return itself because both shares land on the same Form 1040. It becomes decisive at death, at divorce, or when unmarried co-owners have to file separate returns.
Calculating Each Owner’s Gain
Start with the gross sale price and subtract selling costs: real estate commissions, title insurance, transfer taxes, and similar closing expenses. That gives you the amount realized. Then subtract the property’s adjusted basis. What’s left is the capital gain.
Your initial basis is usually the purchase price plus non-recurring closing costs from acquisition (recording fees, title search, survey). Add the cost of capital improvements over the years — a new roof, a kitchen renovation, an added bathroom. Routine repairs like painting or fixing a faucet don’t count.
If the property was ever rented, depreciation you claimed (or should have claimed) reduces your basis. That depreciation gets taxed at sale as unrecaptured Section 1250 gain at a maximum rate of 25%, higher than the standard long-term capital gains rate most taxpayers pay.2Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed Recapture applies before the remaining gain hits the regular rates, so a former rental almost always produces a bigger bill than a home used solely as a residence.
Once the total adjusted basis and total amount realized are set, each co-owner takes their ownership percentage of both. A 70/30 tenancy in common means one owner uses 70% of the basis and 70% of the proceeds; the other uses 30% of each. Bracket, exclusion eligibility, and deductions are then evaluated separately for each person.
2026 Capital Gains Rates
Long-term capital gains apply to property held more than one year. The 2026 brackets:3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 0% on taxable income up to $49,450 (single) or $98,900 (married filing jointly).
- 15% from $49,451 to $545,500 (single) or $98,901 to $613,700 (married filing jointly).
- 20% above $545,500 (single) or $613,700 (married filing jointly).
Most people selling a jointly owned home land in the 15% bracket. But the gain stacks on top of your other income for the year and can push part of it into a higher tier. Someone with $80,000 in wages and a $200,000 allocated gain has $280,000 in combined income, still 15% if filing single. Bump that gain to $500,000 and part spills into the 20% tier.
High earners also face a 3.8% net investment income tax on capital gains when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).4Internal Revenue Service. Topic No. 559, Net Investment Income Tax These thresholds aren’t indexed for inflation, so more taxpayers cross them every year. A large sale can push a co-owner over the line even if their ordinary income wouldn’t.
The Primary Residence Exclusion
Section 121 lets you exclude up to $250,000 of gain ($500,000 for a married couple filing jointly) on the sale of your primary home if you owned and lived in it for at least two of the five years before the sale.5Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The two years don’t need to be consecutive.
Unmarried Co-Owners
Each unmarried co-owner qualifies independently. If both meet the ownership and use tests, each can exclude up to $250,000 of their allocated share, sheltering up to $500,000 between them. If only one lived in the home, only that person gets the exclusion. The other pays tax on their full allocated gain at the applicable long-term rate.
Married Couples Filing Jointly
For the full $500,000, either spouse must meet the ownership test and both spouses must meet the use test.5Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence If one spouse owned the home before the marriage and both lived there for two years afterward, the couple qualifies. Filing separately caps each spouse at $250,000.
Non-Qualified Use
The exclusion is reduced for periods when the property was not anyone’s primary residence — for example, years it was rented before you moved in. The IRS divides non-qualifying time by total ownership time and applies that fraction to the gain; the portion tied to non-qualified use can’t be excluded.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Time after your last day of residence doesn’t count against you, and temporary absences of up to two years for health or employment reasons are also excluded. This rule hits hardest when someone converts a rental to a personal residence and then sells: even after living there two full years, the rental years still produce taxable gain.
Inheriting a Co-Owner’s Share: The Step-Up in Basis
When a co-owner dies, the inherited share usually gets a new basis equal to fair market value on the date of death. That step-up erases the appreciation that built up during the deceased owner’s lifetime, and it’s often the difference between a large tax bill and none at all.
Common Law States
For property held as joint tenancy with right of survivorship or tenancy in common in a common law state, only the deceased owner’s share is stepped up. The survivor’s share keeps its original historical basis. If two siblings each own 50% of a house with an original basis of $200,000 and the property is worth $400,000 when one dies, the survivor’s basis becomes a blend: $100,000 on their original half plus $200,000 on the inherited half, totaling $300,000. A sale at $400,000 produces a $100,000 gain, all of it on the survivor’s original half.
For a married couple holding property as joint tenancy or tenancy by the entirety in a common law state, the surviving spouse gets a step-up on the deceased spouse’s half. The survivor’s total basis becomes half the original cost basis plus half the fair market value at death.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
Community Property States
Community property is treated more generously. When one spouse dies, the entire property — including the surviving spouse’s half — is stepped up to fair market value.7Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent A couple who bought their home for $200,000 in a community property state and sees it grow to $800,000 by the first spouse’s death gives the survivor a basis of $800,000. Selling at $800,000 produces zero taxable gain.8Internal Revenue Service. Publication 551 (12/2025), Basis of Assets The full step-up applies to tenancy by the entirety in community property states too, as long as the property is classified as community property.
Deferring the Tax With a 1031 Exchange
If the jointly owned property is investment or business real estate (not a personal residence), co-owners can defer capital gains tax by rolling the proceeds into a replacement investment property under Section 1031.
Tenants in common get real flexibility here. Each co-owner is treated as a separate taxpayer, so one can complete a 1031 exchange while the other takes cash and pays the tax. That flexibility is one reason investors often prefer tenancy in common over LLCs or partnerships for co-owned property. When title is held through an LLC or partnership, the entity itself is the taxpayer, so members generally have to agree on the exchange. The workaround is restructuring into separate tenancy-in-common interests well ahead of the sale, often at least a year in advance, so each person can act independently.
The replacement must be like-kind (another investment property, not a personal home), and the deadlines are strict: 45 days to identify replacements and 180 days to close.
Adding Someone to the Deed Can Trigger Gift Tax
Creating joint ownership is easy to overlook as a taxable event. When you add a non-spouse to a deed using your own funds, you’ve made a gift equal to their share of the property’s value.9Internal Revenue Service. Instructions for Form 709 A parent adding an adult child to the deed of a $500,000 home has made a $250,000 gift.
The 2026 annual gift tax exclusion is $19,000 per recipient.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Because property transfers usually blow past that number, the donor typically has to file Form 709. No gift tax is owed until the lifetime exemption is exhausted, but the filing requirement still applies, and skipping it can create problems years later when the property sells and the IRS questions basis allocation.
Transfers between spouses are exempt. Adding a spouse as a joint tenant is generally not a taxable gift under the unlimited marital deduction, whether the ownership form is joint tenancy or tenancy by the entirety.
Gifting also affects the new co-owner’s basis. The recipient takes the donor’s basis in the gifted share — a carryover basis, not a stepped-up one. That co-owner will eventually owe capital gains tax on all the appreciation since the original purchase, a worse outcome than inheriting the same share and getting a step-up.
If a Co-Owner Is a Foreign Person: FIRPTA
When any co-owner is a foreign person (not a U.S. citizen or resident alien), the buyer must withhold 15% of the amount allocated to that foreign co-owner under FIRPTA.10Internal Revenue Service. FIRPTA Withholding Withholding is on the foreign owner’s share only, not the whole sale price. Spouses are treated as contributing 50% each for allocation.11Internal Revenue Service. Instructions for Form 8288 (Rev. January 2026) An exemption applies when an individual buyer intends to live in the home at least 50% of the days occupied during each of the first two years and the sale price is $300,000 or less.12Internal Revenue Service. Exceptions From FIRPTA Withholding The foreign co-owner can file a U.S. return to recover any withholding that exceeds actual tax owed. U.S. co-owners are not affected on their own shares.
Reporting the Sale
The settlement agent files Form 1099-S with the IRS reporting gross sale proceeds.13Internal Revenue Service. Instructions for Form 1099-S When there are multiple co-owners, each should get a separate 1099-S reflecting their share. Married couples holding jointly are treated as a single transferor and get one form unless they request an allocation.
In practice, settlement agents sometimes put the whole sale price on one co-owner’s 1099-S. If that happens to you, report the full amount on Form 8949 and enter an adjustment using code “N” (nominee) to back out the portion belonging to the other owner.14Internal Revenue Service. Instructions for Form 8949 (2025) The co-owner who didn’t get a 1099-S just reports their allocated share directly on their own Form 8949.
Each co-owner enters acquisition date, sale date, allocated proceeds, and allocated adjusted basis on Form 8949. If Section 121 applies, the excluded amount reduces the gain on that form. The net flows to Schedule D and then to Form 1040.
One last practical point. Property sales close at unpredictable times, and if your resulting tax liability is $1,000 or more after withholding and credits, you can owe an estimated tax penalty for not paying quarterly.15Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax If you know a sale is coming, make an estimated payment in the quarter it closes rather than waiting for the return.