5.18 Joint Tenancy Basis Rules for Surviving Tenants

If you are a surviving joint tenant, your basis for the property depends on how much of the value was includible in the deceased tenant’s gross estate, and this depends on whether the joint tenant was your spouse or someone other than your spouse.

Caution:

If you inherited property from a person who died in 2010 and the executor elected on Form 8939 to apply the modified carryover basis rules (5.17), basis will be determined under that election.

Qualified joint interest rule for survivor of spouse who died after 1981.

A “qualified joint interest” rule applies to a joint tenancy with right of survivorship where the spouses are the only joint tenants, and to a tenancy by the entirety between a husband and wife. Where the surviving spouse is a U.S. citizen, one-half of the fair market value of the property is includible in the decedent’s gross estate. This is true regardless of how much each spouse contributed to the purchase price. Fair market value is fixed at the date of death, or six months later if an estate tax return is filed and the optional alternate valuation date is elected. These rules do not apply if the surviving spouse is not a U.S. citizen on the due date of the estate tax return. In this case, the basis rule is generally the same as the rule discussed below for unmarried joint tenants.

The surviving spouse’s basis equals 50% of the date-of-death fair market value (the amount included in the decedent’s gross estate), plus one-half of the original cost basis for the property; see Example 1 below. If no estate tax return was due because the value of the estate was below the filing threshold, the surviving spouse’s basis is one-half of the fair market value of the property at the date of death (alternate valuation is not available) plus one-half of the original cost basis. If depreciation deductions for the property were claimed before the date of death, the surviving spouse must reduce basis by his or her share (under local law) of the depreciation; see Example 2 below.

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image Planning Reminder
Spousal Joint Tenancies Created Before 1977
If spouses jointly own property and one spouse dies, the surviving spouse generally receives a stepped-up basis of 50% of the date-of-death value. The IRS at one time took the position that the 50% stepped-up basis rule applied to pre-1997 spousal joint tenancies. However, after the Tax Court and two federal appeals courts allowed a surviving spouse a 100% stepped-up basis if the spousal joint tenancy was created before 1977 and the surviving spouse did not contribute to the purchase price (see Example 3 in 5.18), the IRS decided to follow the Tax Court decision.
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EXAMPLES
1. John and Jennifer Jones jointly bought a house for $50,000 in 1979. John paid $45,000 of the purchase price and Jennifer $5,000. In 2012, John died when the house was worth $200,000. One-half, or $100,000, was included in his estate although he contributed 90% of the purchase price. For income tax purposes, Jennifer’s basis for the house is $125,000.
One-half of cost basis $25,000
Inherited portion 100,000
Jennifer’s basis $125,000
2. Same facts as in Example 1 except that the home was rental property for which $20,000 of depreciation deductions had been allowed before John’s death. Under local law, Jennifer had a right to 50% of the income from the property and, thus, a right to 50% of the depreciation. Her basis for the property is $115,000: $125,000 as shown in Example 1, reduced by $10,000, her share of the depreciation.
3. The Gallensteins purchased farm property in 1955 as joint tenants; Mr. Gallenstein provided all the funds. When he died in 1987, Mrs. Gallenstein claimed that 100% of the property was includible in her husband’s gross estate and she had a stepped-up basis for that full amount. The IRS argued that under the rules for estates of spouses dying after 1981, she received a stepped-up basis for only 50% of the date-of-death value. The federal appeals court for the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) agreed with Mrs. Gallenstein. The appeals court held that pre-1977 spousal joint tenancies were not affected when the law was changed to provide a 50% estate tax inclusion and 50% stepped-up basis for spousal deaths after 1981. For pre-1977 spousal joint tenancies, the prior law rule continues to apply: 100% of the date-of-death value of jointly held property is included in the estate of the first spouse to die unless it is shown that the survivor contributed towards the purchase. In this case, where Mrs. Gallenstein’s deceased husband had paid the entire purchase price, her basis was 100% of the value of the property and she realized no taxable gain when she sold the property at a price equal to that stepped-up basis.
The Tax Court and the Fourth Circuit Appeals Court (Maryland, North Carolina, South Carolina, Virginia, and West Virginia) agreed with the Sixth Circuit’s approach of allowing a 100% stepped-up basis for a pre-1977 spousal joint interest where the deceased spouse had paid the entire purchase price. The IRS acquiesced to the Tax Court decision and no longer litigates the issue.

Unmarried joint tenants.

If you are a surviving joint tenant who owned property with someone other than your spouse, your basis for the entire property is your basis for your share before the joint owner died plus the fair market value of the decedent’s share at death (or on the alternate valuation date if the estate uses the alternate date). Even if the estate is too small to require the filing of an estate tax return, you may still include the decedent’s share of the date-of-death value in your basis. However, if no estate tax return is required, you may not use the alternate valuation date basis.

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image Planning Reminder
Joint Property Held With Non-Spouse
If you own property with someone other than your spouse, then at the other owner’s death your basis for the property equals your original contribution to the purchase plus the portion of the property’s value that was includible in the gross estate of the deceased owner.
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EXAMPLE
You and your sister bought a home in 1990 for $120,000. She paid $72,000, and you paid $48,000. Title to the house was held by both of you as joint tenants. In 2012, when she died, the house was worth $250,000. Since she paid 60% of the cost of the house, 60% of the value at her death, $150,000, is included in her estate tax return (or would be included if an estate tax return was due). Your basis for the house is now $198,000—the $48,000 you originally paid plus the $150,000 fair market value of your sister’s 60% share at her death.

Exception for pre-1954 deaths.

Where property was held in joint tenancy and one of the tenants died before January 1, 1954, no part of the interest of the surviving tenant is treated, for purposes of determining the basis of the property, as property transmitted at death. The survivor’s basis is the original cost of the property.

Survivor of spouse who died before 1982.

The basis rule for a surviving spouse who held property jointly (or as tenancy by the entirety) with a spouse who died before 1982 is generally the same as the above rule for unmarried joint tenants. However, special rules applied to qualified joint interests and eligible joint interests are discussed below.

EXAMPLE
A husband and wife owned rental property as tenants by the entirety that they purchased for $30,000. The husband furnished two-thirds of the purchase price ($20,000) and the wife furnished one-third ($10,000). Depreciation deductions taken before the husband’s death were $12,000. On the date of his death in 1979, the property had a fair market value of $60,000. Under the law of the state in which the property is located, as tenants by the entirety, each had a half interest in the property. The wife’s basis in the property at the date of her husband’s death was $44,000, computed as follows:
Interest acquired with her own funds $ 10,000
Interest acquired from husband (2/3 of $60,000)    40,000
 $50,000
Less: Depreciation of ½ interest not acquired
by reason of death (½ of $12,000)      6,000
Wife’s basis at date of husband’s death $ 44,000
If she had not contributed any part of the purchase price, her basis at the date of her husband’s death would be $54,000 ($60,000 fair market value less $6,000 depreciation). This basis would be increased by any additions or improvements made to the property by the wife since the husband’s death, and reduced by any depreciation (5.20).

Qualified joint interest and eligible joint interest where spouse died before 1982.

Where, after 1976, a spouse dying before 1982 elected to treat realty as a “qualified joint interest” subject to gift tax, such joint property was treated as owned 50–50 by each spouse, and 50% of the value was included in the decedent’s estate. Thus, for income tax purposes, the survivor’s basis for the inherited 50% half of the property is the estate tax value; the basis for the other half is determined under the gift rules (5.17). Personal property is treated as a “qualified joint interest” only if it was created or deemed to have been created after 1976 by a husband and wife and was subject to gift tax.

Where death occurred before 1982 and a surviving spouse materially participated in the operation of a farm or other business, the estate could have elected to treat the farm or business property as an “eligible joint interest,” which means that part of the investment in the property was attributed to the surviving spouse’s services and that part was not included in the deceased spouse’s estate. Where such an election was made, the survivor’s basis for income tax purposes includes the estate tax value of property included in the decedent’s estate.

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