Capital Gains on Property Jointly Owned With a Non-Spouse: Siblings, Friends and Partners

Each co-owner reports only their own share of the price and their own basis

Publication 544 describes two siblings selling a farm together: each one's gain or loss is the difference between their share of the sales price and their own adjusted basis. Publication 527 applies the same split while you own the property, letting an owner of a one-half undivided interest deduct half of the expenses.

The closing agent reports the split. The Form 1099-S instructions require a separate form for each transferor and tell the filer to request an allocation of gross proceeds among the transferors at or before closing. If no allocation is received, each owner's form shows the total unallocated proceeds, which leaves each of you explaining the difference on your return, so agree the split in writing before closing.

Your share is normally your ownership percentage, but it follows what you actually own. Owners who contributed unequally, or whose deed says something different from their agreement, should settle the percentages before the sale.

Bases can differ sharply between co-owners of the same building

Basis is personal. An owner who bought at the start, an owner who bought in later at a higher price, an owner who inherited a share with a value at death, and an owner who received a share as a gift with the donor's carryover basis can all hold one building. Each also carries their own depreciation history, so a share inherited recently has had little depreciation and a share held since purchase may have a lot.

Joint tenancy with right of survivorship between non-spouses adds a twist. Under section 2040(a), the full value is included in the first owner's estate except the part the survivor can show they paid for. Publication 551 works the example: two joint tenants paid $30,000, two-thirds and one-third, took $12,000 of depreciation, and the property was worth $60,000 when the larger contributor died, giving the survivor a basis of $44,000. The married-couple half-and-half rule does not apply.

That contribution rule makes records of who paid what essential. A survivor who cannot show their contribution may see the whole value taxed in the estate, which raises basis but may cost estate tax.

Worked example: two friends sell a duplex for $900,000

Hypothetical, round figures. Two friends bought a duplex in 2012 for $400,000 as equal tenants in common and have each claimed $60,000 of depreciation. They sell in 2026 for $900,000 and pay $50,000 of selling expenses, so each one's amount realized is $425,000.

Each one's adjusted basis is $200,000 minus $60,000, or $140,000, and each has a $285,000 gain, of which $60,000 is unrecaptured section 1250 gain taxed at ordinary rates capped at 25 percent. The rest is long-term capital gain taxed according to each owner's own income. If one friend is single with $300,000 of other income, her gain stacks into the 20 percent band above $545,500 and the 3.8 percent net investment income tax; a lower-income co-owner may pay 15 percent and no surtax on the same dollars.

If one of them had inherited her half in 2022 when it was worth $350,000 and taken only $40,000 of depreciation since, her basis would be $310,000 and her gain $115,000, against $285,000 for her co-owner. Run your own numbers with your CPA.

One co-owner can exchange while the other takes cash, if you own as co-owners

Reg. section 1.1031(a)-3 lists co-ownership among the interests that are real property for section 1031. Each co-owner is a separate taxpayer, so each can sign their own exchange agreement with a qualified intermediary, identify their own replacement property and close on their own timeline, while the other is paid in cash at closing.

That works only if you are co-owners. Reg. section 301.7701-1(a)(2) says mere co-ownership of property that is maintained, kept in repair and rented is not a separate entity, but co-owners who provide services to occupants can be a partnership. Property titled in a multi-member LLC is generally a partnership asset, and a partnership interest is not real property. Drop-and-swap strategies, multi-owner exchange options and the same-taxpayer rule cover the restructuring.

Splitting up often means one exchanges into a fractional interest and the other is bought out

Co-owners who want different outcomes rarely want to buy another building together. An owner who exchanges can buy a whole property alone or a fractional interest in a traditional DST, which lets a share of one sale be placed without a new partner; co-owners after one sale and buying out a co-owner with 1031 proceeds cover the variations.

To defer fully, the exchanging owner reinvests their whole share of net proceeds and replaces their share of any debt paid off.