Tenants in Common vs. Joint Tenancy: Tax Differences

What each structure means

In a tenancy in common (TIC), each co-owner holds a separate, undivided fractional interest in the property. Each owner's interest is their own asset — they can sell it, gift it, or include it in their estate independently. In a joint tenancy, all owners hold identical interests with a right of survivorship: when one owner dies, their share automatically passes to the surviving owners, bypassing probate.

For married couples, a third variant exists: community property (in nine states), which can provide a full step-up on both halves at the first death — a significant advantage over joint tenancy, which typically steps up only the decedent's half.

1031 exchange flexibility

TIC owners have a major advantage: each co-owner's fractional interest is treated as real property for 1031 exchange purposes. Owner A can exchange their 50% TIC interest into a different replacement property while Owner B sells their 50% outright or exchanges into something else entirely. This flexibility is why real estate investors who want different exit strategies tend to prefer TIC over joint tenancy.

Joint tenants cannot easily do separate 1031 exchanges — a joint tenancy must generally be severed (converting it to a TIC) before individual exchanges can occur. Unplanned severance can affect basis allocation and should be planned carefully.

Basis at death

At the death of one joint tenant, the survivor receives a step-up on the decedent's share only — typically 50% if there are two owners. The survivor's own original share does not step up. In community property states, both halves step up at the first death (IRC 1014(b)(6)), which is a powerful advantage.

In a TIC, each owner's share steps up to FMV at their death. The other TIC owners' shares are unaffected. This means TIC ownership is flexible at death — each owner can direct their share by will — but does not provide the community property double step-up.

How co-owners report income and expenses

Neither structure files its own tax return by default. Each co-owner reports their proportionate share of rental income and expenses directly on their own Schedule E, according to ownership percentage. A 60/40 TIC splits rent, repairs, property tax, and depreciation 60/40; joint tenants (usually equal shares) split 50/50.

Each owner also depreciates their own share of the building on their own schedule, using their own share of the cost basis. Because each return is independent, one co-owner can, for example, be a real estate professional using losses currently while the other suspends them — the passive-loss tests are applied person by person, not to the property as a whole.

Basis when contributions are unequal

Co-ownership basis follows the dollars each owner actually put in, plus their share of financed cost. If two people buy a $400,000 rental as tenants in common but one contributes $300,000 and the other $100,000 of the down payment and they agree to a 75/25 split, their starting bases and their income and expense shares track that 75/25 ratio. Documenting the intended percentages in writing at purchase avoids disputes later, especially at sale or death when each owner's gain is computed against their own basis.

Joint tenancy is presumed equal, which can create an unintended gift when one person funds more than their equal share (see below). Keep clear records of who paid what, because the IRS and your co-owners will need them to compute gain, depreciation recapture, and step-up at death.

Adding a co-owner can trigger gift tax

Retitling a solely owned property into joint tenancy or TIC with someone who did not pay for their share is a gift of that fractional interest. If the value transferred exceeds the annual gift tax exclusion ($19,000 per recipient for 2025), the giver must file a gift tax return (Form 709), though actual tax is usually only owed after the large lifetime exemption is exhausted.

This commonly surprises parents who add an adult child to a deed "for convenience." Beyond the gift filing, the child takes a carryover basis in the gifted portion — no step-up on that share at the parent's death, unlike an inheritance — which can create a larger future capital gain. Adding a co-owner is an estate and income tax decision, not just a paperwork step.

TIC interests in a 1031 exchange — and the partnership trap

A properly structured TIC interest can be replacement property in a 1031 exchange, which is the basis of syndicated TIC and Delaware Statutory Trust (DST) offerings that let investors 1031 into fractional shares of large properties. The IRS set out conditions for TIC arrangements to be respected as co-ownership (rather than a partnership) in Revenue Procedure 2002-22 — limits on the number of co-owners, unanimous consent for major decisions, and restrictions on shared business activities.

The risk is that a TIC operated too much like a joint business is recharacterized as a partnership. That matters because a partnership interest is not like-kind to real property — IRC §1031(a)(2) excludes partnership interests — so an investor who thought they held real estate for exchange purposes could find their interest ineligible. Investors relying on TIC status for a 1031 should have the arrangement reviewed against Rev. Proc. 2002-22.

Severance and planning

Converting joint tenancy to TIC (severance) is generally not a taxable event by itself, but it removes the survivorship feature and can affect how basis is allocated going forward. Investors who want independent exit strategies — different 1031 targets, different sale timing, or the ability to will a share to specific heirs — usually prefer TIC from the outset to avoid a mid-stream severance.

Whichever structure you choose, coordinate it with the rest of the estate plan. Joint tenancy avoids probate but overrides your will for that asset and gives only a partial step-up outside community property states; TIC preserves testamentary control and a full step-up on each decedent's share but must be directed by a will or trust. A brief consultation with a real estate attorney and tax advisor before titling prevents expensive corrections later.

Selling a fractional interest

Because a TIC interest is a separate asset, an owner can sell just their fractional share. The selling owner computes gain against their share of the adjusted basis and reports it on their own return, including their share of depreciation recapture. The remaining co-owners are unaffected and keep their original bases. This independence is a major reason investors with differing time horizons choose TIC — one partner can cash out while the others hold.

Joint tenants have less flexibility. Selling requires either all owners to agree to sell the whole property or a severance of the joint tenancy into a TIC first. Practically, a joint tenant who wants out usually must convince the co-owners to sell or buy them out, whereas a TIC owner can market their interest — though a fractional interest typically sells at a discount because buyers are scarce.

Financing and liability differences

Lenders generally want all co-owners — TIC or joint tenant — to sign the mortgage and be jointly liable, regardless of ownership percentages. That means a 25% TIC owner can still be on the hook for the full loan if a co-owner defaults, a risk worth papering over with a co-ownership agreement that spells out who pays what and what happens on default. Neither TIC nor joint tenancy provides the liability shield of an LLC.

For investors who want both the tax flexibility of separate interests and liability protection, a common structure is each owner holding their interest through their own single-member LLC, or the whole property held in a multi-member LLC (which is taxed as a partnership and changes the reporting entirely). The right choice depends on your 1031 goals, liability tolerance, and estate plan — decide it before you take title, because restructuring later can itself be a taxable event.

Get the titling right before you buy

Because each structure carries different consequences for 1031 exchanges, basis, survivorship, and gift tax, the co-ownership form should be a deliberate decision made before closing, alongside a written co-ownership agreement covering contributions, expense sharing, decision-making, and exit. Changing course later — severing a joint tenancy, unwinding an accidental gift, or restructuring into an LLC — can trigger tax and legal complications that a few hours of upfront planning with a real estate attorney and tax advisor would have avoided.

Frequently asked questions

Sources

• IRS — Like-Kind Exchanges (Real Estate Tax Tips)
• IRS — About Form 8824

Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.

Related

• 1031 Exchange Calculator
• Tenancy-in-Common (TIC) for a 1031 Exchange
• Step-Up in Basis at Death for Rental Property