How Does Capital Gains Tax Work on Jointly Owned Property?

When co-owners sell a property, capital gains tax on jointly owned property is calculated and paid by each owner separately, on their own share of the profit. You take the sale price, subtract selling costs and the property’s adjusted basis to get the total gain, then split that gain according to each person’s ownership interest. From there, every co-owner runs the numbers through their own tax situation: their bracket, their eligibility for the home-sale exclusion, their other income for the year. Two people selling the same house can walk away with very different tax bills.

How the Gain Gets Divided Between Co-Owners

The deed controls the split. Four ownership structures cover almost every case.

Tenancy in common lets co-owners hold unequal shares, such as 70/30. Each owner reports the matching percentage of proceeds and basis.
Joint tenancy with right of survivorship gives all owners equal shares. Two co-owners each report 50% of the gain.
Tenancy by the entirety is available only to married couples in certain states and splits the gain equally, usually on one joint return.
Community property, recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, treats property acquired during a marriage as 50/50 between spouses.¹

For spouses filing jointly, the structure barely affects the return itself since both halves land on the same Form 1040. It matters most when a co-owner dies, at divorce, or when unmarried co-owners each file their own return.

Calculating the Taxable Gain

Start with the gross sale price. Subtract selling costs: real estate commissions, title insurance, transfer taxes, and similar closing expenses. That gives you the amount realized. Subtract the property’s adjusted basis, and the difference is the capital gain.

Basis usually starts with what you paid, including non-recurring closing costs at purchase like recording fees, title search charges, and survey fees. Add the cost of capital improvements made over the years: a new roof, a kitchen renovation, an added bathroom. Routine maintenance like painting or fixing a leaky faucet does not count.

If the property was ever rented out, depreciation you claimed (or should have claimed) reduces your basis. That depreciation doesn’t disappear at sale. The IRS taxes it as unrecaptured Section 1250 gain at a maximum rate of 25%, higher than the standard long-term capital gains rate most taxpayers pay.² Recapture applies first, then the remaining gain is taxed at regular capital gains rates. Former rentals almost always generate a larger tax bill than a pure personal residence.

Once you have the total adjusted basis and the total amount realized, apply each co-owner’s percentage. A 70/30 tenancy in common means one owner uses 70% of basis and 70% of proceeds; the other uses 30% of each. Each person’s bracket, exclusion eligibility, and deductions then get evaluated independently.

What Rate You’ll Pay in 2026

Long-term capital gains, from property held more than a year, are taxed at graduated rates based on your total taxable income. For 2026:³

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 home sellers land in the 15% bracket, but the sale itself can push you higher because the gain stacks on top of your other income. A single co-owner with $80,000 in wages and a $200,000 allocated gain stays in the 15% bracket on $280,000 of combined income. Make that gain $500,000, and part of it spills into the 20% tier.

High earners face an extra 3.8% net investment income tax on capital gains when modified adjusted gross income tops $250,000 for married couples filing jointly or $200,000 for single filers.⁴ These thresholds don’t adjust for inflation, so they catch more sellers each year. A big property sale can easily push a co-owner over the line even if their ordinary income alone wouldn’t.

The Primary Residence Exclusion

The $250,000 single / $500,000 married exclusion is the single most valuable break for home sellers. You can exclude that much gain if you owned and used the property as your main residence for at least two of the five years before the sale.⁵ The two years do not have to be consecutive.

Unmarried Co-Owners

When unmarried people co-own a home, each person qualifies for the exclusion independently. If both meet the ownership and use tests, each can exclude up to $250,000 of their allocated gain, sheltering up to $500,000 between them. If only one co-owner lived there, only that person gets the exclusion. The other pays tax on their full share 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.⁵ One spouse can be the sole owner, provided both lived in the home for two years. Spouses filing separately are each capped at $250,000.

Partial Exclusion

Selling before two years because of a job relocation, a health issue, or certain unforeseen circumstances like divorce or job loss lets you claim a partial exclusion. The amount equals the fraction of the 24-month requirement you met, multiplied by the maximum. Selling after 18 months of qualifying use gives you 18/24 of $250,000, or $187,500.

Non-Qualified Use for Former Rentals

A separate rule reduces your exclusion if the property had periods of non-qualified use, meaning time when nobody used it as a primary residence. The gain allocated to those periods cannot be excluded. The IRS divides the time the property was not your main home by your total ownership period and applies that fraction to the gain.⁶ Time after your last day of residence doesn’t count against you, and temporary absences up to two years for health or employment reasons are excluded. The rule hits hardest when a rental is converted to a personal residence and then sold: the rental years still generate taxable gain even after you move in for two full years.

If a Co-Owner Has Died

Inheriting a share of jointly owned property usually resets the basis on the inherited portion to the property’s fair market value on the date of death. This step-up often turns a large tax bill into almost nothing.

Common Law States

With joint tenancy or tenancy in common in a common law state, only the deceased owner’s share steps up. The survivor’s share keeps its original basis. Say two siblings each own half of a house with an original basis of $200,000, and the property is worth $400,000 when one dies. The survivor’s new basis blends their original $100,000 with the stepped-up $200,000 on the inherited half, totaling $300,000. A sale for $400,000 produces $100,000 of gain, all attributable to appreciation on the survivor’s original share.

For married couples holding property as joint tenants or by the entirety, the surviving spouse gets a step-up on the deceased spouse’s half. The survivor’s new basis is half of the original cost plus half of the date-of-death value.⁷

Community Property States

Community property is dramatically more generous. When one spouse dies, the entire property, including the survivor’s half, steps up to fair market value.⁷ All pre-death appreciation is wiped out. A couple who bought their home for $200,000 and owns it worth $800,000 at the first spouse’s death ends up with a survivor basis of $800,000. A sale for that price produces zero gain.⁸

Reporting the Sale

The settlement agent files Form 1099-S reporting the gross sale price.⁹ With multiple co-owners, the agent should issue a separate 1099-S to each one showing their share. Married couples who held the property jointly are usually treated as a single transferor and receive one form.

In practice, the settlement agent sometimes puts the full sale price on a single co-owner’s 1099-S. If that happens, report the full amount on Form 8949 and enter a nominee adjustment using code “N” to back out the portion belonging to the other co-owner.¹⁰ The co-owner who didn’t receive a 1099-S reports their share directly on their own Form 8949.

Each co-owner enters the acquisition date, sale date, allocated proceeds, and allocated adjusted basis on Form 8949. If the Section 121 exclusion applies, reduce the gain by the excluded amount on that form. The net flows to Schedule D and then to Form 1040.

If the sale produces $1,000 or more in tax after withholding and credits, you may owe an estimated tax penalty unless you’ve made quarterly payments.¹¹ Many co-owners don’t realize the exposure until it’s too late. If you know a sale is coming, make an estimated payment in the quarter it closes rather than waiting until you file.

Three Situations With Different Rules

A few scenarios fall outside the standard calculation and are worth flagging.

Investment property and 1031 exchanges. If the property is held for investment rather than as a personal residence, co-owners may defer the gain through a like-kind exchange into another investment property. For tenants in common, each co-owner decides independently: one can roll into a replacement property while the other takes cash and pays the tax. Strict deadlines apply: 45 days to identify replacement property and 180 days to close. The exclusion for a primary residence does not apply here.

Adding someone to the deed. Using your own funds to add a non-spouse to a property deed creates a gift equal to half the property’s value.¹² A parent adding an adult child to a $500,000 home has made a $250,000 gift. The 2026 annual exclusion is $19,000 per recipient,³ so the donor usually must file Form 709 even though no gift tax is actually owed until the lifetime exemption is used up. The new co-owner also takes a carryover basis in the gifted share rather than fair market value, so eventual sale produces more taxable gain than inheriting the same share would have. Transfers between spouses are not treated as taxable gifts.

A foreign co-owner. If any co-owner is not a U.S. citizen or resident alien, the buyer must withhold 15% of the amount allocated to that person under FIRPTA.¹³ Withholding applies only to the foreign owner’s share. The foreign co-owner can file a U.S. return to recover any amount withheld in excess of actual tax owed. U.S. co-owners are not affected by FIRPTA on their own share, but closing paperwork becomes more involved because the settlement agent has to remit the withheld amount on Form 8288.¹⁴

1
Internal Revenue Service. Publication 555 (12/2024), Community Property
2
Office of the Law Revision Counsel. 26 USC 1 – Tax Imposed
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
5
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
6
Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence
7
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
8
Internal Revenue Service. Publication 551 (12/2025), Basis of Assets
9
Internal Revenue Service. Instructions for Form 1099-S
10
Internal Revenue Service. Instructions for Form 8949 (2025)
11
Internal Revenue Service. Topic No. 306, Penalty for Underpayment of Estimated Tax
12
Internal Revenue Service. Instructions for Form 709
13
Internal Revenue Service. FIRPTA Withholding
14
Internal Revenue Service. Instructions for Form 8288 (Rev. January 2026)