Tax implications after home buyout

[Epsic]

If I buyout from my partner (we’re not married) our house, on what capital gain will I be taxed once I sell it?

Let’s assume the house originally costed 500k, I pay him $100k for the buyout. Once I sell it, will I consider the capital gain coming from the selling value minus  $500k or $600k?

[rjs]

The amount that you subtract from the selling price to determine the gain is called your basis. You have to calculate your basis separately for the share of the house that you paid for in the original purchase, and the share that you buy from your partner. How much of the original $500,000 purchase price did each of you pay? That will determine your respective percentages of ownership.

From the figures that you gave, it sounds like you are buying your partner's share of the house for considerably less than its current market value. If so, there is a gift element involved. That complicates the calculation of your basis, and your partner (not you) will almost certainly have to file a gift tax return, though he probably will not actually have to pay any gift tax. To calculate your basis you would need to know the fair market value at the time of the gift, and the amount of any gift tax that he pays, as well as how much he paid towards the original purchase. Fair market value at the time of the gift should be determined by a professional appraisal, not a guess by you or a real estate agent.

If you made any improvements to the house, either before or after the buyout, the cost of the improvements will also affect your basis. The effect of the improvements will be different depending on whether they were made before or after the buyout. Since you don't know what future improvements you might make, you can't really determine right now what your basis will be when you sell the house, but you could come up with a tentative number on the assumption that you will not make any improvements.

Obviously calculating your basis is fairly complicated. If you have a need to know, it would probably be best to consult a local tax professional. But if you want to pursue it here, please give actual amounts, not "let's assume."

[Epsic]

Thank you for your reply. Here are the numbers: original purchase of $680k, we paid a down payment of 20% with our shared account (money of both of us), and applied for a loan for the difference.

Now one of us would give $200k to the other as buyout, in consideration of the current equity of $400k.

Can you please tell me what  the basis would be for the new only owner of the house?

[TomD8]

I would emphasize @rjs 's point that you need to get a professional appraisal of the home's fair market value at the time of the buyout.  The actual net worth of the home will then be its fair market value less the remaining mortgage balance.  Each co-owner's share would be 50% of that amount (assuming that all ownership costs have been split 50/50 prior to the buyout.) 

Let's say that the home's net worth after this calculation is $1 million.  That would make each co-owner's fair share $500K.   If your co-owner sells you his $500K share for $200K, then he's given you a gift of $300K.  That's how the gift tax issue could come into the picture.

Your cost basis would be a different calculation.  Mortgage balances are not part of the cost basis calculation.

[Epsic]

@TomD8 thank you. We already did appraisal and that part of the calculation. I just need to know how the basis would be calculated in a future sale of the house.

[TomD8]

Calculating the cost basis of a home can get complicated if/when there's a gift involved.  As @rjs previously suggested, recommend you seek the services of a local tax professional.

[Epsic]

@TomD8 Thanks, I’m planning to do that. However, there’s no gift involved here.

[AmeliesUncle · Accepted solution]

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@Epsic  wrote:

Thank you for your reply. Here are the numbers: original purchase of $680k, we paid a down payment of 20% with our shared account (money of both of us), and applied for a loan for the difference.

Now one of us would give $200k to the other as buyout, in consideration of the current equity of $400k.

Can you please tell me what  the basis would be for the new only owner of the house?

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Assuming 50% ownership, Basis would be 1/2 of $680k, plus $200k, plus the amount of mortgage that you assumed from the other person (50% of the total mortgage at time of buyout).  Plus 1/2 of cost of any improvements before the buyout, and full cost of improvements made after the buyout.

[Epsic]

@AmeliesUncle Thank you very much! That’s exactly what I was looking for!