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?

[soultax09]

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.

[Anonymous]

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.”.

[TomD8]

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).

[soultax09]

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.

[Anonymous]

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.)

[TomD8]

@Anonymous - Correct.

[Lonestar]

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. 🙂

[ColeenD3]

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.

[Lonestar]

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!

[ColeenD3]

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: 

Qualified Joint Interest

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.

• Tenants by the entirety.

• Joint tenants with right of survivorship if the married couple are the only joint tenants.  PUB 551 

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

[jtax]

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

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I would be more cautious in reaching that conclusion. Doing so requires detailed legal knowledge for the state involved and application of that law to the facts of this case.

If I were arguing for @Lonestar I might well say the writing of "Gift" on the dead was intended as a gift when Aunt died, not an immediate gift. Whether that is right will depend upon state law about gifts. Intent to make a gift (and delivery and parting with dominion and control) are all required for a completed gift. What was the intent here? There are many cases where adding a name to a joint bank account does not make a gift of the assets unless withdrawn. (Google "joint account convenience".) However, real estate is not always the same as bank accounts.

Critically who has to prove the correct intent and what is the level of proof required? Is it the donee (niece)? Is the the IRS challenging you? Is the burden of proof "more likely than not" or something higher like ("clear and convincing evidence").  If it is a higher burden and the IRS has it that might factor into a choice to claim the 100% step-up.  

Or it might well be, perhaps is likely to be, that adding a name to real estate is a completed gift. That it doesn't matter that gift is written on the deed or not. In that particular state just filling out the dead (unlikely a bank account) is enough.

@Lonestar is doing a great job. Clearly stating the detailed facts, reading all that he can find, and planning on seeking professional advice. My recommendation is consulting with an Estate Planning attorney in the state where the property is. Not a CPA. Not a real estate attorney. One credential to look for is an ACTEC fellow. See https://www.actec.org/ but they are sometimes hard to find and/or busy. I would be ok with any attorney who regularly practices estate planning involving real estate.

[jtax]

Oh, BTW, consulting with a attorney is often better than relying on Internet legal advice because then you have professional malpractice insurance to rely on if you get obviously wrong advice. 

[jtax]

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@Lonestar wrote:

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)

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The following may not be what you have in mind for "futures" but I include it in case its helpful.

Adding names as joint tenants is often "the wrong way" to do estate planning. Elderly folks often do this to financial accounts or real estate either 1) to allow someone (child/friend) to help them pay bills or manage the asset or 2) to avoid probate or to easily have the asset go to a particular person when the older-person dies.

There are problems with this.

1. was there a gift or not when the name was added? as you have seen that can be a problem and who needs uncertainty. was a gift tax return required? do you lose the I.R.C. 1014 step-up at death.
2. the new joint owner may not have an asset that can be reached by his or her creditors. Grandma's money could be lost to pay kid's gambling debts or tort liability from a car accident or malpractice liability if a doctor, etc. 

There are better ways

• use a power of attorney to allow the kid to manage the asset
• use a pay or transfer upon death title to be clear when ownership passes (not all states have that for real estate but many do, otherwise a simple trust could achieve the same results

Sometimes however, you do want to transfer ownership of a portion of the property. E.g. for medicaid planning. So it all depends.

[jtax]

@Lonestar you might also be interested in this treasury regulation about joint interests. IRS pubs are great, but they are not the law.  They are not always right or clear. This section is from the gift/estate chapter but that is intertwined with income tax when inherited assets are involved.

https://www.law.cornell.edu/cfr/text/26/20.2040-1

 also 

https://www.law.cornell.edu/uscode/text/26/2040

and for step up

https://www.law.cornell.edu/uscode/text/26/1014

https://www.law.cornell.edu/cfr/text/26/1.1014-1

https://www.law.cornell.edu/cfr/text/26/1.1014-2

[Lonestar]

@jtax  Thanks for all your responses!  Sorry, very busy day yesterday. And thanks for everyone's patience with this. 

1) As for the 'future' situation, it has already been decided as to the JT situation for another piece of property, it's just not time to sell it yet. But, yes, I understand that there are better ways to do it than making someone a JT.

2) I do believe the 'gift' was intended to be at that point in time. I don't think the aunt was anticipating the future ramifications of the creation of the JT, but was doing it for reasons I won't get into on this forum.  Had she known about potential taxation issues, she may have considered another method.
There is no challenge from the IRS, as the return has not been submitted yet. I'd like to do it correctly the first time and have my ducks in a row in case there is a challenge.  Thanks for referring to an Estate Attorney. I did use one for some things while settling the estate so I could circle back with them, if they have specific knowledge on this type of topic.

3) Lastly, funny you mention the Codes on this topic. I had prepared a great response to @ColeenD3 and tried to post it but got dinged for post flooding since it had not been 60 mins since my last post. Later, it had all disappeared! I was pointing to those Codes and seemed to have substantiated my claim that 100% of the FMV should be used... refer to 20.2040-1 Joint interests; (b) Meaning of “property held jointly”; 

(c) Examples. The application of this section may be explained in the following examples in each of which it is assumed that the other joint owner or owners survived the decedent:

(1) If the decedent furnished the entire purchase price of the jointly held property, the value of the entire property is included in his gross estate;

(2) If the decedent furnished a part only of the purchase price, only a corresponding portion of the value of the property is so included;

BTW, there appears to be no need for an Estate Tax Return at this point, so where referenced in CFRs it's not relevant.

And once again:
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.

The figuring of the cost basis seems to hinge on the percentage of contribution of each JT and in our case, there was no contribution by my wife and we would gladly furnish an affidavit to that point.

Then again, to assume that the FMV carries over to the Estate upon death of the sole contributing JT, doesn't necessarily convince me that my preferred application in this tax situation is correct. It may be not have anything do with figuring that tax on selling the house. But, it sure looks like it is supported by Pub 551.

I have the opportunity to get some free legal advice from a tax lawyer, hopefully tomorrow. If that's not enough to get an answer, I'll pursue the estate lawyer route.

Thoughts on talking to the IRS directly? Good or bad idea? LOL