When a non-spouse co-owner dies, the step-up in basis on joint assets held with a non-spouse depends on one question: how much of the asset the IRS treats as belonging to the decedent’s estate. The default answer is all of it. Under IRC Section 2040(a), the entire value of jointly held property with right of survivorship is presumed to belong in the deceased co-owner’s gross estate, and the survivor’s basis in the asset resets to its date-of-death fair market value. The survivor can shrink that inclusion by proving they paid for part of the asset with their own money, but every dollar they exclude from the estate is a dollar that does not get stepped up. That tradeoff is the whole game.
The 100% Inclusion Presumption Under Section 2040(a)
Section 2040(a) starts from a blunt assumption when two unmarried people hold property as joint tenants with right of survivorship: the person who died paid for the whole thing. The full fair market value goes into the decedent’s gross estate unless the survivor can prove otherwise.
The statute allows an exception for the portion the survivor can trace to their own funds, provided that money did not originally come from the decedent as a gift. Everything the survivor cannot document stays in the estate.
This creates an unusual tension. A survivor with no contribution records ends up with a full step-up under IRC Section 1014, because the entire asset was included in the estate and its basis resets to fair market value at death. That is favorable for future capital gains. But the full value also counts toward the estate tax threshold, which for 2026 sits at $15 million federally. A survivor who proves a large contribution shelters that share from estate tax but keeps their original cost basis on it. Only the decedent’s portion steps up. Which outcome produces less total tax depends on the size of the estate and the amount of unrealized gain in the asset.
One boundary worth naming: this analysis is for non-spouses. Married couples get an automatic 50/50 split under Section 2040(b) regardless of who paid, and none of the contribution tracing below applies to them.
Joint Tenancy vs. Tenancy in Common
The form of co-ownership decides whether Section 2040(a) even applies. The 100% inclusion presumption is triggered by joint tenancy with right of survivorship, where the decedent’s share passes automatically to the survivor outside probate.
Tenancy in common works differently. Each owner holds a separate fractional interest that does not pass automatically to the co-owner. When a tenant in common dies, their share goes to whoever they named in their will or trust, and the estate includes only that fractional interest under IRC Section 2033. If two non-spouses each owned a 50% tenancy-in-common interest, only the decedent’s 50% enters the gross estate and receives the step-up. The survivor’s 50% keeps its original cost basis, and no one has to reconstruct decades-old purchase records.
The tradeoff is straightforward. Tenancy in common avoids the documentation problem but caps the step-up at the decedent’s fractional share. Joint tenancy with right of survivorship creates paperwork risk but opens the door to a larger step-up when the survivor cannot prove (or chooses not to prove) their contribution.
Proving Your Contribution
For a joint tenancy asset, a survivor who wants to exclude their share from the decedent’s estate must produce evidence that their contribution came from their own independent funds. The IRS treats the asset as 100% funded by the decedent until records prove otherwise, and the evidence needs to be specific and contemporaneous with the original purchase.
What Counts
The strongest evidence is a paper trail showing money moving from the survivor’s own account directly to the purchase. Settlement statements showing the source of the down payment carry significant weight. Wire confirmations, canceled checks, and bank statements from accounts the survivor held independently form the core of any rebuttal.
Capital improvements also count toward the survivor’s share. A major renovation, structural addition, or full roof replacement increases the survivor’s provable percentage. Routine upkeep like repainting or minor repairs does not. For mortgage payments, only the principal portion adds to contribution. Interest is a deductible expense but does not add to basis.
What Doesn’t
Money the survivor received from the decedent and then put toward the purchase counts as the decedent’s contribution, not the survivor’s. The exception is a properly reported completed gift, and the survivor needs documentation of that too, such as a filed Form 709.
Commingled funds create serious problems. If the co-owners shared a bank account and the down payment came from that account, tracing which dollars belonged to whom becomes difficult or impossible. The IRS will default to treating commingled funds as the decedent’s contribution unless the survivor can untangle the sources.
The Practical Problem
Most of these assets were purchased years or decades ago, and people rarely keep closing documents and old bank statements with this specific tax scenario in mind. If you currently co-own property with someone who is not your spouse, organizing and preserving those records now is far easier than reconstructing them after a death. A folder holding the settlement statement, proof of down payment source, and records of major improvements can save tens of thousands in taxes later.
Joint Bank and Brokerage Accounts
Section 2040(a) explicitly covers deposits held at banking institutions in joint names and payable to either owner or the survivor. Joint bank accounts between non-spouses face the same 100% inclusion presumption as jointly held real estate. If one account holder dies, the IRS presumes the entire balance belongs in that person’s estate.
The contribution analysis works the same way in principle, but joint accounts see constant deposits and withdrawals from both parties, so tracing is often harder than for a single real estate purchase. If the survivor can show what percentage of the deposits came from their own earnings or separate funds, that percentage is excluded.
One important distinction: simply adding someone’s name to a bank account is not a completed gift for tax purposes. The depositor can still withdraw the funds, so no transfer of value has occurred. A taxable gift happens only when the non-depositing co-owner takes money out for their own benefit. The decedent’s deposits into a joint account remain the decedent’s contribution for Section 2040 purposes even though the survivor had legal access all along.
Joint brokerage accounts follow the same logic. The step-up applies to the portion of the account included in the estate, and the cost basis of individual securities resets to date-of-death values for that portion. The survivor’s contributed portion keeps the original purchase-date basis on each security.
Calculating the New Basis
Once the inclusion question is settled, the new basis has two components: the survivor’s original basis on their proven share, plus the fair market value of the portion included in the decedent’s estate. Multiply the survivor’s contribution percentage by the original purchase price, then add the decedent’s included percentage multiplied by the date-of-death fair market value.
Take a property purchased for $500,000 that is worth $1,000,000 when the co-owner dies. If the survivor proves they contributed 40% of the purchase price, the new basis is (40% × $500,000) + (60% × $1,000,000) = $200,000 + $600,000 = $800,000. The survivor keeps their original $200,000 basis on their share and gets a $600,000 stepped-up basis on the decedent’s share.
If the survivor cannot prove any contribution, 100% of the asset is included, and the entire basis resets to $1,000,000. That eliminates all pre-death capital gains but maximizes the value exposed to estate tax.
For a tenancy-in-common asset with a 50/50 split, the math tracks the fractional ownership rather than contributions: (50% × $500,000) + (50% × $1,000,000) = $750,000. The survivor’s half keeps its original basis regardless of who actually funded the purchase.
When the Asset Has Lost Value: The Step-Down
The Section 1014 adjustment works in both directions. If the asset has dropped since purchase, the basis resets to the lower fair market value at death. This is a step-down, and it is a real trap.
Suppose two co-owners bought property for $800,000 and it is worth $500,000 when one of them dies. If 100% is included under the non-spousal presumption, the survivor’s new basis becomes $500,000, not $800,000. The $300,000 loss disappears. The decedent could not claim it because they did not sell, and now the survivor cannot claim it either because their basis has been reset downward. If you co-own a depreciated asset with a non-spouse and believe the value may not recover, selling before death at least preserves the ability to recognize the loss.
The Alternate Valuation Date
The estate executor can elect under IRC Section 2032 to value all estate assets six months after the date of death instead of on the date of death. The election is available only when it would decrease both the gross estate value and the total estate tax. If the asset was sold or distributed within those six months, the value on the date of sale or distribution is used instead.
This matters for the survivor’s basis. IRC Section 1014(a)(2) provides that when the executor makes this election, the heir’s basis equals the alternate valuation date value rather than the date-of-death value. If real estate or stocks dropped significantly in the six months after death, the alternate date produces a lower basis, which hurts the survivor’s future capital gains but reduces the estate tax bill. The election is irrevocable once made, and the return must be filed within one year of the deadline (including extensions) for the election to be available. This decision rests with the executor, not the survivor, and it directly affects the survivor’s future tax on the asset.
Basis Consistency and Form 8971
When a federal estate tax return (Form 706) is required, the executor must file Form 8971 and provide each beneficiary a Schedule A showing the value of property they received. IRC Section 1014(f) imposes a consistency requirement: the beneficiary cannot use a basis higher than the value reported on the estate tax return.
Form 8971 is due no later than 30 days after the estate tax return is filed or 30 days after it was required to be filed, whichever comes first. Whatever value the executor puts on the jointly held property on Form 706 becomes the ceiling on the survivor’s basis for the stepped-up portion. Reporting a higher basis on a future sale can trigger penalties.
This requirement only applies when a Form 706 is actually required. With the federal exemption at $15 million for 2026, many estates will not need to file. But when an estate does cross that threshold, the survivor needs the Schedule A from the executor to calculate their adjusted basis correctly.
State Estate Taxes Change the Math
The $15 million federal exemption means most estates will not owe federal estate tax. Roughly a dozen states and the District of Columbia impose their own estate taxes with significantly lower thresholds, some starting at $1 million or $2 million. An estate well below the federal exemption can still face a state bill, and jointly held assets included under Section 2040(a) count toward that state threshold too.
This shifts the contribution-proving decision. Even without federal estate tax exposure, a survivor in a low-exemption state may have real reason to document contributions and reduce the amount pulled into the decedent’s estate. In states without an estate tax, letting the full inclusion stand and taking the larger step-up is often the better outcome. The right choice depends on the decedent’s domicile and the total estate value relative to both federal and state thresholds.
Reporting the Sale
When the survivor eventually sells, the transaction goes on Form 8949 and the totals carry to Schedule D of Form 1040. The difference between the net sale price and the adjusted basis is the taxable capital gain or loss.
One rule works in the survivor’s favor on the stepped-up portion. Under IRC Section 1223(9), inherited property is automatically treated as held for more than one year, no matter how soon after death the survivor sells. Even a sale the week after death qualifies for long-term capital gains rates on the stepped-up share. For 2026, long-term rates are 0%, 15%, or 20% depending on taxable income.
The survivor’s own contribution portion follows normal holding period rules. Since the survivor has typically held that interest since the original purchase, it also qualifies for long-term treatment in most cases. The combined gain or loss from both portions goes on the same Form 8949 entry, using the blended adjusted basis from the contribution analysis.