What Is IRC 2040? Joint Interests, Spousal Share, and Basis

Under Internal Revenue Code Section 2040, how much of a jointly owned asset lands in a deceased co-owner’s gross estate depends almost entirely on whether the co-owners were married to each other. For spouses who are the only joint owners and both U.S. citizens, exactly half the property’s fair market value is included, regardless of who paid. For any other joint ownership, the IRS starts from the assumption that the entire value belongs in the decedent’s estate, and the survivor has to prove their own money went into the property to bring that number down.¹

What Ownership Section 2040 Covers

The statute reaches property held with a right of survivorship, meaning the decedent’s share passes automatically to the co-owner outside probate. That covers joint tenancy with right of survivorship, tenancy by the entirety (a spouses-only form available in some states), and joint bank accounts payable to either owner or the survivor.¹

The bank account rule catches families off guard. A parent who adds an adult child to a checking account for convenience has created a joint interest that Section 2040 will look at when the parent dies.

Tenancy in common is different, and Section 2040 does not govern it. A tenant in common’s fractional share passes through the will or trust and is picked up by Section 2033 instead, so only that share is included in the estate.² The consideration furnished test discussed below never enters the picture for tenancies in common.

Non-Spouse Joint Owners: The Full-Value Default

When the joint owners are not married to each other, Section 2040(a) pulls the entire fair market value of the property into the decedent’s gross estate. Splitting the title 50/50 does not split the tax result. A parent who paid $500,000 for a property and titled it jointly with a child would have the full $500,000, grown to whatever it is worth at death, included in the parent’s estate.¹

The only escape is the consideration furnished test. If the survivor can show they paid part of the acquisition cost from their own independent resources, a proportionate slice of the value comes out of the estate.³ The burden sits on the survivor or the executor, not the IRS.

What Counts as the Survivor’s Own Money

The contribution has to originate with the survivor, not trace back to the decedent.

Wages, business income, and returns on assets the survivor already owned all qualify.
If the decedent previously gifted the survivor an income-producing asset, the income later thrown off by that asset counts as the survivor’s contribution, but the gifted asset itself does not.³
Cash the decedent gave the survivor and the survivor then poured into the purchase is still treated as the decedent’s contribution. The money traces back.¹
The statute demands consideration “in money or money’s worth.” Whether labor like renovation work qualifies is not addressed in the regulations, so sweat equity is a risk area worth professional review.

Proving It

Without documentation, the IRS defaults back to 100% inclusion. Useful records include bank statements, cancelled checks, loan documents in the survivor’s name, and evidence of the survivor’s separate income or assets when the property was bought. Fund tracing is the recurring problem. If the decedent’s money hit the survivor’s account, mixed with the survivor’s earnings, and later left as a lump sum toward the purchase, the IRS resolves the ambiguity against the estate. Anyone holding property jointly with a non-spouse should keep the acquisition file permanently.

The Math on a Partial Contribution

Once contribution is proven, the fraction excluded from the estate equals the survivor’s contribution divided by the total acquisition cost, including capital improvements.³ Say the property cost $400,000 total, the decedent paid $300,000 and the survivor paid $100,000 from independently earned money, and the property is worth $800,000 at death. The survivor contributed 25% of the cost, so 75% of the current value, or $600,000, is included in the estate and $200,000 is excluded.

Spousal Joint Owners: The Automatic Half

For a legally married couple who are the sole joint owners, Section 2040(b) drops the consideration test and includes exactly one-half of the fair market value in the deceased spouse’s gross estate. It does not matter which spouse funded the purchase, and it applies to joint tenancy with right of survivorship and tenancy by the entirety alike.¹

The included half usually generates no estate tax because the unlimited marital deduction under Section 2056 lets the estate deduct the full value of property passing to a surviving spouse who is a U.S. citizen.⁴ The inclusion still matters, though, because it sets the income tax basis on the survivor’s side.

When the Surviving Spouse Is Not a U.S. Citizen

Section 2056(d) shuts off the unlimited marital deduction if the surviving spouse is not a U.S. citizen, and it also turns off the automatic 50% rule of Section 2040(b). The property falls back to the general rule of Section 2040(a), and the full consideration furnished test applies as if the couple were not married for these purposes.⁴

The marital deduction can still be preserved by moving the property into a qualified domestic trust before the estate tax return is filed.⁴ Missing that deadline can produce an immediate tax on property that would have passed tax-free between citizen spouses.

Property the Co-Owners Received from Someone Else

The consideration test does not apply when the joint owners got the property together by gift, bequest, or inheritance from a third party. If a grandparent left land to two grandchildren as joint tenants, neither grandchild furnished consideration, and only the deceased grandchild’s fractional share is included in their estate.³ The same fractional approach applies to a married couple who received property jointly from a third party. The number happens to match the standard spousal 50% result, but the regulatory path is different.

Creating the Joint Interest Can Trigger Gift Tax

Adding someone as a joint owner on property you paid for is itself a taxable transfer. Purchasing property with your own money and titling it jointly with another person who has survivorship rights is treated as a gift equal to half the value.⁵ That gift may need to be reported, and if it clears the annual exclusion it uses up part of the lifetime gift and estate tax exemption. The gift tax exposure at creation and the estate tax inclusion at death are separate problems that compound when neither has been planned for.

The Inclusion Amount Sets the Income Tax Basis

Section 2040 does more than fix an estate tax number. Whatever ends up in the decedent’s gross estate takes a new basis equal to date-of-death fair market value under Section 1014.⁶ That step-up can wipe out years of unrealized appreciation when the survivor eventually sells.

For a surviving spouse in a common-law state, only the 50% included in the decedent’s estate gets stepped up. The other half keeps its original cost basis, adjusted for improvements and depreciation, producing a blended basis. In community property states, Section 1014(b)(6) steps up both halves of community property, not just the included half.⁶

For a non-spouse survivor, whatever percentage was included in the estate is what gets stepped up. If the survivor could not prove any contribution and the full value was included, the entire property gets a fresh basis. If the survivor proved a 25% contribution, only 75% is stepped up and 25% keeps its old basis.

There is an irony worth noticing. The harsher the estate tax inclusion, the better the basis for the survivor. When the estate sits well below the exemption and owes no tax either way, a larger inclusion is pure upside on future capital gains.

Does Any of This Actually Produce a Tax Bill?

For 2026, the basic exclusion amount is $15,000,000 per individual after the increase enacted by the One, Big, Beautiful Bill signed into law in July 2025.⁷ Form 706 is required only when the gross estate exceeds that threshold.⁸

For estates well under $15 million, the Section 2040 inclusion figure carries no estate tax consequence. It still drives the survivor’s basis, though, and the survivor’s basis drives capital gains whenever the property is sold. The exemption makes the estate tax bill disappear. It does not make the inclusion analysis optional.

1
Office of the Law Revision Counsel. 26 US Code 2040 – Joint Interests
2
Office of the Law Revision Counsel. 26 US Code 2033 – Property in Which the Decedent Had an Interest
3
eCFR. 26 CFR 20.2040-1 – Joint Interests
4
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
5
eCFR. 26 CFR 25.2511-1 – Transfers in General
6
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
7
Internal Revenue Service. What’s New – Estate and Gift Tax
8
Internal Revenue Service. Frequently Asked Questions on Estate Taxes