When a non-spouse co-owner dies, the step-up in basis on joint assets depends entirely on how much of the asset the IRS includes in the decedent’s estate. The default rule under IRC Section 2040(a) presumes the decedent paid for 100% of a jointly held asset, which means the survivor gets a full step-up to date-of-death fair market value, but the full value is also exposed to estate tax. If the survivor proves they contributed their own money, that share is excluded from the estate and keeps its original cost basis. Only the decedent’s share gets stepped up.1IRC Section 2040(a)
So the first question isn’t really about basis. It’s about how much of the asset lands in the estate.
Why the IRS Starts by Including the Whole Asset
For two people who aren’t married to each other and hold property as joint tenants with right of survivorship, Section 2040(a) begins from a single assumption: the person who died paid for all of it. The entire fair market value goes into the decedent’s gross estate unless the survivor can prove otherwise.1IRC Section 2040(a)
The statute carves out room for whatever the survivor can trace to their own funds. Money the survivor put in, from sources that didn’t originate as a gift from the decedent, is excluded from the estate. Everything else stays in.
This produces an odd tension that drives the whole analysis. A survivor who documents nothing ends up with 100% inclusion and a full basis reset to fair market value at death under IRC Section 1014. That’s excellent for a future sale. It’s bad if the decedent’s total estate is near the federal exemption, which is $15 million for 2026. A survivor who proves heavy contribution shelters that share from estate tax but keeps their original basis on it, limiting the step-up to the decedent’s portion only.
Which outcome produces less total tax depends on the size of the estate and the amount of unrealized gain in the asset. For most estates, there’s no federal estate tax exposure anywhere near $15 million, and the full step-up is the better result. For larger estates, or in states with low estate tax thresholds, proving contributions can save more than the lost step-up costs.
Joint Tenancy vs. Tenancy in Common
The form of co-ownership changes the analysis completely. The 100% inclusion presumption applies specifically to joint tenancy with right of survivorship, where the decedent’s share passes automatically to the survivor outside probate. That automatic transfer is what triggers Section 2040(a) and the contribution-tracing rules.
Tenancy in common works differently. Each owner holds a separate fractional interest that doesn’t pass automatically to the co-owner. When a tenant in common dies, their share goes to whoever they named in their will or trust. The estate includes only the decedent’s fractional ownership interest under IRC Section 2033.2IRC Section 2033
If two non-spouses each own a 50% tenancy-in-common interest in a property, only the decedent’s 50% enters the gross estate and receives a step-up to date-of-death fair market value. The survivor’s 50% keeps its original cost basis, and no one has to dig up decades-old bank records to prove who paid for what.
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 documentation risk but allows a larger step-up when the survivor can’t prove (or chooses not to prove) their contribution.
A Note on Spousal Ownership
None of this contribution-tracing applies to married couples. IRC Section 2040(b) automatically splits a jointly held asset 50/50 for estate tax purposes between spouses, regardless of who actually paid for it. Half goes into the decedent’s estate and receives a step-up; half stays with the surviving spouse at the original basis. Non-spouses don’t qualify for this “qualified joint interest” treatment and fall under the default rule in Section 2040(a).3IRC Section 2040(b)
Proving the Survivor’s Contribution
For joint tenancy assets, a survivor who wants to exclude part of the asset from the decedent’s estate has to produce evidence that the contribution came from independent funds. The IRS treats the asset as fully 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 into the purchase. Closing documents, especially the settlement statement showing the source of the down payment, carry significant weight. Wire transfer confirmations, canceled checks, and bank statements from accounts the survivor held independently are the core of any rebuttal.
Capital improvements also count toward the survivor’s contribution percentage. A major renovation, a structural addition, or a full roof replacement increases the survivor’s provable share. Routine upkeep like repainting or minor repairs does not. For mortgage payments, only the principal portion increases basis. Interest payments are deductible expenses but don’t add to cost basis.
What Doesn’t Count
Money the survivor received from the decedent and then used for the purchase counts as the decedent’s contribution, not the survivor’s. The one exception is a properly reported completed gift, documented by 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
Many of these assets were purchased decades ago. People don’t usually keep closing documents and bank statements from 20 or 30 years back with this specific tax scenario in mind, and this is where most contribution claims fall apart. If you currently co-own property with someone who isn’t your spouse, organizing records now is far easier than reconstructing them later. A folder with the settlement statement, proof of down payment source, and records of major improvements can save a significant tax bill after a death.
Joint Bank and Brokerage Accounts Follow the Same Rule
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.1IRC Section 2040(a)
Each deposit has a traceable source in principle, so the survivor can shelter the portion they deposited from their own earnings or separate funds. The practical difficulty is that joint accounts typically see constant deposits and withdrawals from both parties over years, which makes tracing much harder than with a single real estate purchase.
Joint brokerage accounts follow the same logic. The step-up applies to the portion included in the estate, and the cost basis of individual securities resets to their date-of-death values for that portion. The survivor’s contributed portion keeps the original purchase-date basis for each security.
Calculating the New Basis
Once the inclusion percentage is settled, the new cost basis combines two numbers: the survivor’s original basis on their proven contribution plus the fair market value of the portion included in the decedent’s estate.4IRC Section 1014
The formula: 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’s 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 can’t prove any contribution at all, 100% of the asset is included in the estate 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 follows 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 Values Drop: The Step-Down Trap
The basis adjustment under Section 1014 works in both directions. If the asset has lost value since it was originally purchased, the basis resets downward to the lower fair market value at death. This is a step-down, and it quietly erases built-in losses.
Suppose two co-owners bought property for $800,000 and it’s worth $500,000 when one of them dies. If 100% is included in the estate under the non-spousal presumption, the survivor’s new basis becomes $500,000, not the original $800,000. The $300,000 loss disappears. The decedent couldn’t claim it because they didn’t sell, and the survivor can’t claim it either because the basis has been reset downward.
For a depreciated asset you co-own with a non-spouse that may not recover, selling before death at least preserves the ability to recognize the loss. Once death occurs, that option is gone.
Deciding Whether to Prove Contributions
With the federal exemption at $15 million for 2026, most estates owe no federal estate tax. For those estates, letting the full 100% inclusion stand and accepting the larger step-up is usually the better outcome, especially where the asset has appreciated significantly.
State estate taxes change the picture. Roughly a dozen states and the District of Columbia impose their own estate taxes with much lower thresholds, some starting at $1 million or $2 million. An estate well below the federal threshold can still face a state estate tax bill, and the inclusion of jointly held assets under Section 2040(a) counts toward that state threshold too.
Even if federal estate tax isn’t a concern, a survivor in a state with a low exemption may have real motivation to document contributions and reduce the amount included in the decedent’s estate. In states without an estate tax, the calculation usually tilts the other way. The right call depends on where the decedent was domiciled and on the estate’s total value relative to both federal and state thresholds.
Reporting the Sale Later
When the survivor eventually sells, the transaction is reported on Form 8949 and the totals carry to Schedule D of Form 1040. The difference between the net sale price and the adjusted basis determines the taxable capital gain or loss.
One favorable rule applies to the stepped-up portion: under IRC Section 1223(9), inherited property is automatically treated as held for more than one year, regardless of how quickly the survivor sells after the death.5IRC Section 1223(9) Even a sale the week after death qualifies for long-term capital gains rates on the stepped-up share. For 2026, long-term gains are taxed at 0%, 15%, or 20% depending on the seller’s taxable income.
The survivor’s own contribution portion follows normal holding period rules. Since the survivor has typically held their interest since the original purchase, that share also qualifies for long-term treatment in most cases. The combined gain or loss from both portions is reported together on the same Form 8949 entry, using the blended adjusted basis from the contribution analysis.