Your Co-Owner Died: Sell, Buy Out the Heirs or Exchange the Property

Title decides who owns the decedent's share, and the deed is the first document to pull

Tenancy in common gives each owner a separate, inheritable share. When one dies, that share goes to the people named in their will or trust, or to their heirs under state law, and you now co-own with them or with the estate.

Joint tenancy with right of survivorship works differently: the decedent's interest ends at death and you own the whole property. Their family inherits nothing in it, whatever the will says. Partnership or LLC ownership is a third case, governed by the operating agreement rather than the deed.

The answer changes everything that follows, so confirm vesting with the title company before anyone signs a listing agreement.

Only the part included in the decedent's estate gets a new basis

Section 1014 sets basis at fair market value at death for property acquired from a decedent. For a tenancy-in-common share, that is the decedent's percentage. Your own share keeps its original cost less the depreciation you were allowed.

For joint tenants who are not married, section 2040(a) includes the full value in the decedent's estate except the part the survivor can show they paid for. Publication 559 computes the survivor's new basis as their original basis plus the value included in the estate, minus the survivor's share of depreciation taken before the death. For spouses who are the only joint tenants, section 2040(b) includes exactly half.

Section 1014(b)(6) adds a further rule for community property: the survivor's half also gets a new basis if at least half of the community interest is included in the decedent's estate.

Get a date-of-death appraisal now, even if no one plans to sell soon. It fixes the heirs' basis, supports the amount included in the estate, and gives the survivor a defensible starting point for any buyout price. An appraisal commissioned years later, after the market has moved, is harder to defend.

Depreciation also restarts on the stepped-up part. Whoever now owns the decedent's share depreciates it from its new basis, while the survivor continues the old schedule on their own share, so the two halves of one building can sit on different schedules from here on.

Worked model: a $1,200,000 building held by two friends

Hypothetical round numbers. Two friends bought a building for $400,000, paying half each, and took $160,000 of depreciation, $80,000 each. One dies when the building is worth $1,200,000. Run your own numbers with your CPA; the point is how title changes the result.

• Tenants in common: the survivor's half has a basis of $200,000 minus $80,000, or $120,000, so selling it for $600,000 realizes $480,000 of gain. The heirs' half has a basis of $600,000 and almost no gain.
• Joint tenancy with proof of equal contribution: half the value, $600,000, is in the estate. The survivor's basis in the whole building is $200,000 plus $600,000 minus $80,000, or $720,000. Selling for $1,200,000 realizes the same $480,000 of gain, but the survivor keeps all the proceeds.
• Joint tenancy without proof of contribution: section 2040(a) can include the entire value in the decedent's estate, which raises the estate's size but also the survivor's basis. Keep the original closing records.
• In both cases, the survivor can defer the $480,000 by exchanging. The heirs, with a stepped-up share, often prefer cash.

Three exits: sell together, buy out the heirs, or split and let each side choose

A sale of the whole property to a third party is the cleanest split. With tenancy-in-common shares, each owner is a separate taxpayer: your share of the proceeds goes to your qualified intermediary for an exchange, and the heirs' share is paid to the estate or to them. Multi-owner 1031 options and one partner wants cash cover the closing mechanics.

Buying out the heirs keeps the property. Your purchase price becomes your basis in the share you buy, while your original share keeps its old basis. You can fund the purchase with proceeds from a separate exchange only if the share is acquired as replacement property within the deadlines; buying out a co-owner with 1031 proceeds explains when that works. If the heirs are your relatives, the related-party rules of section 1031(f) can apply.

If no one agrees, state partition law lets a court order a division or sale. That is slow and expensive, and it is usually the reason to negotiate early.

Exchanging your share, and what the heirs can do with theirs

Your exchange works like any other: identify replacements within 45 days of closing, close within 180, and reinvest all of your share of the net proceeds with your share of the debt replaced. DST interests suit survivors who no longer want a co-owner at all, since each investor's interest is separate.

The heirs are not locked out. Under section 1223(9), property acquired from a decedent and sold within a year is treated as held for more than one year, and an heir or the estate that holds the share for investment can exchange it too. The executor's 1031 guide and inherited rental options cover their side.