How You Own Property Determines Your Capital Gains Tax
In the U.S., the biggest tax benefit for jointly owned assets is the "Step-up in Basis" at death. However, this benefit differs dramatically depending on whether you live in a Common Law or Community Property state. See the difference for yourself with the simulator below.
Step-Up in Basis Simulator
Enter the original cost of a jointly owned asset and its value at the first spouse's death. See how the surviving spouse's new tax basis and potential capital gains tax change based on state law.
Enter Asset Information
If the asset is sold for ,
is the potential capital gain in a Common Law state.
In a Community Property state, the capital gain is $0.
* This chart shows how the new tax basis and taxable gain are structured if the surviving spouse sells the asset at its Fair Market Value (FMV) at death.
The Three Forms of Joint Ownership
The way an asset is titled has a profound impact on taxes, creditor protection, and inheritance procedures. Compare the key features of each ownership type.
Tenancy in Common (TIC)
Each owner holds a separate interest. Shares can be unequal, and inheritance follows the will (requires probate).
- ↔️ Transfer: Shares can be freely sold or gifted.
- 📄 Survivorship: None. Inherited via will.
- 🛡️ Creditors: Can only access each owner's share.
Joint Tenancy with Right of Survivorship (JTWROS)
Owners have equal shares. At death, an owner's share automatically passes to the survivor(s), avoiding probate.
- ↔️ Transfer: Possible, but severs JTWROS.
- automatically.
- 🛡️ Creditors: Can access each owner's share.
Tenancy by the Entirety (TBE)
Only for married couples. Adds strong creditor protection to JTWROS features.
- ↔️ Transfer: Requires consent of both spouses.
- automatically.
- 🛡️ Creditors: Protects against individual debts of one spouse.
Key Rules by Situation: Spouse vs. Non-Spouse
The portion of an asset included in an estate at death is determined completely differently depending on whether the co-owner is a spouse.
50% Inclusion Rule
For U.S. citizen spouses holding property as JTWROS or TBE, **exactly 50%** of the property's value is included in the first spouse's estate. This is known as the "qualified joint interest" rule.
As a result, only the 50% included in the estate receives a step-up in basis to its value at death. The surviving spouse's original 50% share retains its original basis. This is why only a partial step-up occurs in common law states.
Pro Tip: Pre-1977 Property (Gallenstein Rule)
The 50% rule may not apply to spousal joint property created before January 1, 1977. If one spouse can prove they provided 100% of the purchase funds, 100% of the property's value is included in their estate, allowing for a full 100% step-up in basis even in a common law state. This is a powerful exception.
Contribution Rule
For non-spouses (e.g., a parent and child), the default rule is that **100% of the property's value** is included in the estate of the first person to die.
However, the includible amount can be reduced by the percentage that the surviving co-owner can prove they contributed from their own funds. The burden of proof is entirely on the survivor.
Contribution Calculation Example
Example: A parent and child own a $500,000 house jointly. If the child can prove they contributed $100,000 (20%) from their own money, what happens?
Amount included in parent's estate at death: $500,000 x 80% = $400,000
The Paradoxical Benefit: If the survivor cannot prove contribution, 100% is included in the estate. If the total estate is below the exemption amount (so no estate tax is due), the survivor gets a full 100% step-up in basis, which can be more favorable for capital gains purposes.
Advanced Strategies and Pitfalls
Joint ownership seems simple, but used incorrectly, it can cause serious problems. Learn about professional planning techniques and traps to avoid.
Some common law states (like Florida and Tennessee) allow couples to establish a special trust to treat their assets as community property. The primary goal is to achieve the 100% step-up in basis benefit, same as in community property states. However, this is an advanced strategy with considerable risk, as the IRS has not officially sanctioned its treatment for federal tax purposes.
JTWROS is popular for its simplicity in avoiding probate, but this often masks serious drawbacks. With non-spouses, it can trigger unintended gift taxes, lead to a loss of control over the asset, expose it to co-owners' creditors, and prevent a full step-up in basis in common law states. For most sophisticated estate plans, a Trust is a far superior alternative.
Adding a child's name to a house deed to avoid Medicaid estate recovery is extremely risky. This action is considered a "gift" and can trigger Medicaid's 5-year look-back period. If Medicaid is needed within 5 years, this can result in a lengthy period of ineligibility as a penalty. For Medicaid planning, professional tools like irrevocable trusts should be used instead of joint ownership.