My father and I acquired a property with joint tenants title. He furnished 90% of the total cost. He passed away how much the basis of the house can step up?

JT presumed to be 50/50 interest unless specified in the deed so 1/2 gets a stepped up basis.

I was told in the non-spousal JT property, the step up basis depends on how much each owner contributed to the total purchase cost.  E.g., if one owner paid 90% of the total cost, when he passed away the basis stepped up 90%.  Is that right?

I agree with soultax09 that JT means a 50/50 split so 50% gets stepped up.  in addition, since dad paid for 90% but only ended up with 50%,he made a gift to you that should be(en) reported on a gift tax return.  say price was $100 he paid $90 but ended up with $50 so the gift is $40.   if the purchase was in 2019, then no return is required if the gift was less than $15,000.  the executor would need to file.   the gift to you doesn't get stepped up.  

what if the purchase was a long time ago and a return wasn't filed.  i'm guessing that the IRS would do nothing as long as no tax was due.

you are free to consult with an attorney to see if we're missing something

According to IRS Publication 551, page 10, @Anonymous is correct.  If the property was held as JTWROS and deceased father contributed 90% of the purchase price, 90% of its FMV at his death is includible in his estate, and is eligible for step-up in cost basis.

JTWROS with  a spouse is considered a "qualified joint interest" and the FMV at a spouse's death is split 50/50 regardless of contribution.

https://www.irs.gov/pub/irs-pdf/p551.pdf

Read Pub 551 page 10 and agree with TomD8....but the IRS makes no sense....what's the difference if the father and son buy property held as jtwros and father pays 90% at closing and son pays 10% at closing ****OR**** father gives son cash right before closing and father and son each pay 50% at closing? Results should be the same but they're not according to the IRS.

Thanks for your guidance I read the article which is very helpful.  I also have related questions as follows.

We recorded the grant deed with JTWROS title when the escrow was closed.  Since the furnished ratio to the property is 90% to 10%,

Q1:  is there any gift tax issue?

Q2:  what documents needed to show IRS for the furnished ratio?

 Thanks 

I'd show cancelled checks and stuff like that....could be wire transfers or receipts in the closing docs and the like.

The gift tax thing is a gift tax return because no gift tax would be owed if your father was under the $11,400,000 exclusion amount and if over you should get a lawyer anyway.....but I don't know how there would be a gift after reading Pub 551 because a completed gift would be removed from the estate.....looks like Pub 551 says it's not removed from the estate but sort of inherited by the joint tenant with a step up in basis according to the percentage contributed by the deceased.

@Anonymous :There is no gift or gift tax involved.  A property share acquired by death of a joint tenant is not a gift.

@soultax09 :  <<what's the difference if the father and son buy property held as jtwros and father pays 90% at closing and son pays 10% at closing ****OR**** father gives son cash right before closing and father and son each pay 50% at closing? Results should be the same but they're not according to the IRS. >>

It might make a very big difference when son sells the property.  If the split were 50/50, only 50% of the cost basis would be stepped up to the FMV at death; if the split is 90/10, 90% of the cost basis is stepped up.  The higher the cost basis, the lower the capital gain tax the son will have to pay at sale.

@TomD8: <<It might make a very big difference when son sells the property.  If the split were 50/50, only 50% of the cost basis would be stepped up to the FMV at death; if the split is 90/10, 90% of the cost basis is stepped up.  The higher the cost basis, the lower the capital gain tax the son will have to pay at sale.>>

That wasn't my point and I get what you are saying....higher basis is better for the son.....but where the father gives cash to the son first and then the son immediately uses the cash to pay his full share of the 50% a gift tax return needs to be filed.....where the father does ***NOT*** give the son cash first but pays 90% of the cost at closing a gift tax return does ***NOT*** need to be filed because there is no gift according to the IRS.....does that make sense to you? It doesn't to me.

@soultax09 :  I don't think the IRS would regard either circumstance as a gift, because in each case father receives something of value in return for his money: partial ownership of the house.

If father gave money to the son to purchase a home in which the father took no ownership interest, THAT would be a gift.

@TomD8: Okay here's an example:

House costs $100,000.....father pays $90,000 at closing son pays $10,000 at closing...father furnishes 90% of the cost....no gift and the house is in father's estate stepped up to fmv at death per the IRS.

***OR*** House costs $100,000....father gives son $40,000 in cash.....father then pays $50,000 at closing and son pays $50,000 at closing....gift tax return needs to be filed for the $40,000 in cash father gave son and there is no step up in basis for that $40,000 father first gave son to get the percentage of ownership down from 90% to 50%.

So when father pays the 90% at closing why isn't the difference between what the son paid and the father paid a gift? State law says father and son each own 50% as jtwros, not 90/10 if they went to court. ?????

The deceased owner’s step up value will be put in the estate tax.  E.g., the purchase value was $100G and the FMV at the death was 200G.  For 90/10 ratio 180G will be claimed in estate tax (skip the exemption here).  

If F gave S 40G as a gift and claimed the gift tax.  At the death only 100G was claimed in the the estate tax.  From IRS perspective, he/she doesn’t lose anything.

@Anonymous I ***get*** that....I'm saying something different which is that the IRS treats JT differently than state law.

Per state law, each joint tenant owns an ***equal*** undivided interest in the property.....if there are 2 JTs each owns an undivided 1/2 interest....if there are 4 JTs each owns an undivided 1/4 interest.....that's NOT arguable.

Point is the IRS looks at how much each JT contributed and that's contrary to state law where it makes no difference....one JT could contribute $90,000 while the other contributes $10,000 and the state still treats them as owning an undivided 1/2 interest....if either JT sued for partition and the court ordered a sale each would get 1/2 of the sales proceeds and it doesn't matter that one contributed more absent fraud or something like that.

If the IRS treated JT like the states, then if there were 2 JTs where one contributed more than 50% the excess above 50% would be treated as a gift to the other JT.

Unless you have the means to prove otherwise (and I assume you do) then the split is 50/50. Otherwise if you can prove it, then it's 90/10. Also understand that just because one owner contributed 90%, does not always mean they own 90%. So don't be surprised if challenged by the IRS on your 90/10 claim.

There is no gift tax. Your deceased father did not in any way, form or fashion "give" you his share. With a JTWROS ownership, you "automatically" inherited his share and the inheritance was outside of any last will and testament he may have left.

Your step-up in cost basis will be the appropriate percentage of the FMV on the date of his passing, and "NOT" the date you acquired full ownership of the property.

You should be receiving a K-1 from his 1041 Estate return showing the inheritance passing of his ownership to you. There should be no need to enter the K-1 in your tax return, but there "could" be. So if unsure, just ask once you receive the K-1 and can see what all is on it. (For example, if you inherit a tax-deferred retirement account, it "could" be taxable to you, depending on how you handle it.)

No K-1 will be sent because JTWROS property passes by operation of law....it passes outside of the probate process and does not impact the estate other than inclusion for estate tax purposes.

Carl,

Thanks.  Would you elaborate more about

”Also understand that just because one owner contributed 90%, does not always mean they own 90%. So don't be surprised if challenged by the IRS on your 90/10 claim.”.

The IRS rule on the basis of property held by a surviving tenant refers only to % of each tenant's contribution to the purchase price, not to their % of ownership.  (IRS Pub. 551) 

I agree with @Carl that it would be wise to document the contribution percentages at time of purchase.

Determining the basis is an issue only when the surviving tenant (who now owns 100%) sells the property and has to calculate his capital gain (or loss).

Agree....not just wise but a necessity to document contribution percentages.

From the CPA Practice Advisor

Basis and Income Tax Rules for Joint Tenants that are Not Married

• Income Tax Purposes: Each tenant includes an equal share of the income and deductions from the property on their individual income tax returns. It does not matter how much each tenant originally contributed to the purchase of the property. When the property is sold, each tenant will report an equal share of any gain from the sale on their individual returns. Depreciation is calculated based on an equal percentage share.

• Estate Tax Purposes: Generally, when a tenant passes away, the amount of the fair market value of the property that gets included in the decedent’s estate is determined by how much each tenant actually contributed. However, if the surviving tenants cannot prove their personal contributions to the purchase of the property, the entire fair market value of the property will be included in the estate of the first tenant to die.[5] When this happens, the surviving tenants will determine their own basis in the property by equally dividing the total interest in the property. If a property owner gifts an equal share of the property to another person by adding them to the title, the entire fair market value of the property will be included in the donor’s gross estate. This is true even if the donor filed a gift tax return for the half that was gifted. For estate tax purposes the gift is set aside. Any gift tax that the donor paid can be used towards the payment of the estate tax.[6] The surviving tenant(s) will automatically inherit the property, and the fair market value of the property will be divided equally between the remaining tenants.

Soultax9, Tom and Carl,

Thanks for providing so much info.  My friend has a similar case “ She and her mom bought a house with JTWROS title, her mom pay all the cost.”  When her mom die, her basis will get 100% step up, right?    (She has no TurboTax account so I post for her.)

@Anonymous - Correct.

This is an older post so I don't know what happens if I reply with further comment/questions, but here goes. 
And... I hate to be so long-winded but it seems necessary to make a complete case. We are talking about 10's of thousands of dollars here...

 In our case:

Aunt made niece JTWROS on aunt's California home in 2008. No consideration (contribution/payment) was made by the niece.  In fact, the aunt wrote 'Gift' on the Grant Deed.

Aunt passed in 2021, with the home going directly to the niece. House was then sold in 2021. Niece never lived in home with aunt.

Now doing joint return for the niece, my wife. Was told by CA CPA that 1/2 the aunt's original price and 1/2 the FMV at D.O.D gets attributed to niece and niece gets only 50% step-up basis. Potentially huge tax bill!

Researching hard, and if reading correctly, see in IRS Pub 551, 'Property Held by Surviving Tenant', page 10, if a non-qualified (non-spouse) JT has no consideration in the cost of the property, here being the niece and surviving JT, that the entire FMV the time of death of the other JT (aunt) is attributed to the aunt's estate and the surviving JT's stepped up basis is the same FMV (not just the 50%). Pub 551 makes no mention of living on or in the property in this section. 

Based on the last few replies for this post, and the following two statements from different law offices in online documents and the IRS Pub 551, it seems clear that the niece's stepped-up basis would be 100% of the FMV.

• JTWROS property’s step up in basis depends on whether or not the owners are married. If married there will be a 50% step up in basis. If not, it is based on the decedent’s percentage of contribution.
  
  
• For non-married joint tenants, the rule looks at contribution. If the decedent paid for the property, then added his daughter's name and held the asset in joint tenancy upon his death, there is a basis adjustment to 100% of the property. If the daughter dies first, there is no basis adjustment.

From IRS Pub 550, Page 10 – (Depreciation is irrelevant – my note)
If Jim hadn't contributed any part of the purchase price, his basis at the date of John's death would be $54,000. This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property.

If this is all true, maybe the biggest question not is, must the JT have lived in the property/home to make this a reality? Otherwise, what if it is undeveloped property that has no dwelling? (Because, this is a scenario we will have to work through in the future as well)

It seems quite clear to me but maybe I am being too optimistic. I may be hoping against hope. 🙂

Yes, the following is correct. She was gifted half and inherited half. The gifted half is half of the aunt's adjusted basis at the time of the gift. "Was told by CA CPA that 1/2 the aunt's original price and 1/2 the FMV at D.O.D gets attributed to niece and niece gets only 50% step-up basis."

The scenario you present relates to two people who buy a house together even if one party contributes nothing to the cost. The niece was very clearly gifted property that she had no prior claim on.

Thanks... @ColeenD3  so this blurb from a tax law firm's example of a case is incorrect? I mean, I'm not suggesting it's impossible for them to be wrong...

• For non-married joint tenants,

  the rule looks at contribution

  . If the decedent paid for the property, then added his daughter's name

  and held the asset in joint tenancy upon his death

  ,

  there is a basis adjustment to 100% of the property

  . If the daughter dies first, there is no basis adjustment.

There are so many caveats and exclusions, it's hard to understand them all. I guess my point is, the IRS publication 551 does say that if there is no consideration by the second JT in the property, which in fact does make it a gift, that in that case the basis gets adjusted to FMV, less any gift tax paid by the giver. I don't see any mention of a joint tenancy must happen at the time the property is purchased, but I will keep reading the Greek. I am open to further comment as to how I could be misinterpreting those very words.

I do plan on speaking with a tax lawyer but I appreciate the experts' opinions here in the community as well. I am going to pursue every possible avenue on this before I let it go. Thanks again!

Maybe the fact of the JTWROS is what is confusing the issue. 

While state law governing property ownership varies by jurisdiction, there are a number of principles generally applicable to a tenancy by the entirety. Tenancy by the entirety is a form of property ownership, including personal property in some jurisdictions, available only to a husband and wife as a marital unit. A key feature of the tenancy is the right of survivorship–the surviving spouse becomes the fee simple owner of the property upon the death of the other spouse. The tenancy also is terminated by the transfer of the property or upon the spouses’ divorce. JTWROS

Also: 

Include one-half of the value of a qualified joint interest in the decedent's gross estate. It doesn't matter how much each spouse contributed to the purchase price. Also, it doesn't matter which spouse dies first.

A qualified joint interest is any interest in property held by married individuals as either of the following.

This is a gift. Your aunt even said so: "In fact, the aunt wrote 'Gift' on the Grant Deed."