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Hi @Amcraig !

Thanks for the question. I will address each part separately: 

we will split the money 50/50. How do we itemize on our next year tax return?

Your income will be according to your percent ownership in the property, based on how title is held. If you are listed as a 50% owner, you will need to claim 50% of the sale proceeds as income on your individual tax return. Remember to also adjust the basis amount used to determine gain accordingly as well. 

Similarly, you will be allowed to add 50% of any selling costs to your basis in the property, unless there are costs that were incurred completely by you for the sale of your specific share and not incurred by other owners, in which case you could add 100% of those costs to your basis. 

Example like every receipt we have for the improvements? Etc??

If you share ownership in the property 50/50, then you share ownership of capital improvements made along the way 50/50 as well. So, for example, if the property cost $100,000 at the time of purchase, and you made $50,000 worth of capital improvements, your individual basis would be $75,000 ($100,000/2 + $50,000/2). 

what is the % of tax will we be taxed on the capital gains? 

When you sell an investment property, you are taxed for two different types of income - first, you are taxed for any amount that has been previously depreciated (or was allowed to be depreciated), this is called "depreciation recapture." This portion of the gain is taxed at your ordinary income tax rate (whichever tax bracket you are in). Second, if there is additional gain, you are taxed at your capital gains tax rate. If you have held the property for less than one year, the capital gains tax rate is the same as your ordinary income tax rate. If you have held the property for more than one year, see below: 

The income amounts are your total taxable income, including the capital gain. 

how can we avoid paying the capital gain tax?

There are 2 ways to avoid paying taxes on the sale of a real estate investment property: 

1. If you lived in the property as your main home for at least 2 of the past 5 years, you can exclude up to $250,000 ($500,000 for married filing jointly) of gain from your income, not including depreciation recapture. 
2. You can defer paying taxes on the proceeds by completing what is called a 1031 exchange, which involves reinvesting the proceeds from the sale in a "like-kind" property (which would be another real-estate investment property) within specified time periods. If you want more information on 1031 exchanges, click here 

I hope this helps you! Please respond here if you have further questions. 

All my best,

Adam, EA

TurboTax Live Expert