Lewes CPA
officeProgar & Company, P.A.
Certified Public Accounting services for businesses and individuals
Jointly-held property: inclusion in gross estate (MS Word)
Jointly-held property: inclusion in gross estate (.pdf)
Jointly-held property: inclusion in gross estate
Dear Reader:
You recently asked how property you own jointly with another is
treated for estate tax purposes.
Right of survivorship.
Joint ownership with right of survivorship means that at the death
of one co-owner, his interest immediately and automatically passes
to the other co-owner. The estate tax rule for property owned
jointly with your spouse is easy: 50% of its value is included in
your estate. If the joint owner is not your spouse, it depends on
how the property was acquired. If it was a gift or inherited, again,
50% is included. (If there are three owners, 33.3%, etc.) If it was
purchased, then the amount includible in your estate depends on how
much you and your joint owner (or owners) contributed to the
purchase price.
For example, say A and B (unmarried) bought investment real estate
for $30,000 back in 1950. A contributed $20,000 and B contributed
$10,000. The value has risen to $1 million at the time of A's death.
Because A contributed 2/3 of the cost, 2/3 of the value ($666,667)
is included in his estate. Had B died first, only $333,333 would
have been included in her estate. This difference of $333,334 was
caused by a difference of only $10,000 in contributions at the time
of purchase.
The effect of debt.
If the property owned jointly (not with a spouse) is subject to
debt, the debt will have an impact on the estate tax rule described
above. Any debt that is outstanding at the time of death is treated
as contributed equally by the joint owners. And payments made to pay
down the balance of the debt are treated as contributions to the
cost of the property.
Example (1).
C and D buy investment property that they own jointly with right of
survivorship. C contributed $20,000, D contributed $30,000, and a
$50,000 mortgage was taken out. C dies when the value of the
property is $150,000. The balance due on the mortgage is still
$50,000 (only interest had been paid on it). C is treated as having
contributed $45,000: the actual contribution of $20,000 plus half of
the outstanding debt. This is 45% of the cost. Thus, at C's death,
$67,500 (45% of $150,000) is included in his estate.
Example (2).
The facts are the same as in Example (1) except that $10,000 of the
mortgage had been paid off with the $10,000 in payments made by C.
Now, of the $100,000 cost, C will be treated as having contributed
$50,000: his original actual $20,000, his mortgage payments of
$10,000, and one-half the debt balance (1/2 of $40,000 = $20,000).
Thus, $75,000 would be included in his estate.
Tenancy in common.
Another form of joint ownership is tenancy in common in which the
co-owners do not have any survivorship right. Thus, for example, if
there are three equal co-owners and one dies, his interest passes to
his heirs and not to the other owners. Where a decedent dies owning
property held in this form of joint ownership, the fraction of the
property's value representing the decedent's ownership share is
included in his estate. It is irrelevant how much each owner
contributed to the cost.
Please let me know if you have any other questions on this or any
other estate tax matter.