The short answer
Tenancy by the entirety is a form of joint ownership available only to married couples, in the states that recognize it, in which the spouses hold the property as a unit with a right of survivorship and neither can sell or encumber it alone. For federal income tax, each spouse is treated as owning half, so the couple exchanges the property together and can take the replacement in the same vesting. For estate tax it is a 'qualified joint interest' under section 2040(b), so half the value is included at the first death and half the basis is stepped up.
At a glance
| Who can hold it | Spouses only, and only in states whose law provides for it |
|---|---|
| Creditor feature | Many states bar a creditor of one spouse from levying, but a federal tax lien can attach |
| Estate inclusion | One-half of the value, regardless of who paid |
| Replacement vesting | Can be repeated on the replacement if both spouses are the exchangers |
The tenancy is a creature of state law that federal tax law treats as two half interests.
The tenancy comes from the common law idea that spouses own as one, and state law decides whether it exists, whether it covers real property only and what protection it gives. In United States v. Craft, 535 U.S. 274 (2002), the Supreme Court noted Michigan's rule that entireties land is not subject to levy for a judgment against one spouse alone, but held that each spouse's rights are 'property' to which a federal tax lien attaches.
For estate tax, section 2040(b)(2) defines a qualified joint interest as property held by spouses as tenants by the entirety, or as joint tenants with right of survivorship if they are the only joint tenants. IRS Publication 551 explains the basis result: the survivor keeps the cost basis of his or her half, reduced by depreciation allowed, and adds the basis of the half inherited, which under section 1014 is generally its value at death.
A hypothetical: the couple exchanges, keeps the vesting, and one spouse later dies.
Hypothetical figures: spouses own a rental as tenants by the entirety with a $400,000 adjusted basis. They exchange it for a $1,000,000 replacement, taking title again as tenants by the entirety, and the carried-over basis is $400,000, or $200,000 each.
Years later one spouse dies when the property is worth $1,200,000 and the survivor's half has been depreciated to a $150,000 basis. Half the value, $600,000, is in the estate, so the survivor's basis becomes $150,000 plus $600,000, or $750,000. The deferred gain on the inherited half is wiped out; the gain on the survivor's own half remains. Run your own numbers with your CPA.
It bites on title changes at the replacement closing and in states that do not recognize the tenancy.
Because both spouses own the relinquished property, both are the exchangers, and the replacement should be vested in both names. Adding or dropping a spouse at the replacement closing raises the same-taxpayer question discussed in adding a spouse to title on the replacement.
If the replacement is in a state that does not recognize the tenancy, the couple must choose another vesting, such as joint tenancy or, in the states listed in IRS Publication 555, community property. Basis results differ by vesting, which is worth modelling with the 1031 vs hold for step-up guide.
Related questions
Does tenancy by the entirety protect the property from IRS liens?
No. The Supreme Court held in United States v. Craft that a federal tax lien against one spouse attaches to that spouse's interest in entireties property, even where state law bars ordinary creditors.
Do both spouses have to sign the exchange documents?
Yes, in practice. Neither spouse can convey entireties property alone, and because each is treated as owning half for income tax, both are the exchangers and both should be named in the exchange agreement and on the replacement deed.
Is tenancy by the entirety better than joint tenancy for the step-up?
Between spouses, no difference: both are qualified joint interests with half included at the first death. Community property can produce a larger step-up, as the community property entry explains.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.