Capital gains on joint owned property

[MMM35]

Hello,

I was on the deed/loan of a property with 2 other family members. One of the three people were living in the property as their primary residence. The other 2 were on the loan in order to help the person living there qualify and were not living there. The property was never claimed as a deduction on anyone's taxes as we all use the standard deduction. 

The property was sold for a gain at the end of 2022. Would it be right to assume that the person who lived there can claim the capital gain for themselves and the other 2 family members do not need to claim it? We did not profit from the sale. The person living there received the proceeds from the sale.

[GeorgeM777]

No, it would not be right.  If all three were on the deed, then all three are owners of the property.   Unless there is contrary evidence, each of you owned an undivided interest in one-third of the home.  Upon its sale, because there was a gain, each of you would be responsible for reporting your respective pro-rata share of that gain. 

The party that lived in the home may be able to claim a capital gain exclusion provided the requirements for such exclusion have been met.  As per the IRS, those requirements are as follows:  

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

Sale of a Home

Did you receive a 1099-S in connection with the sale?  If yes, are all parties listed on the 1099-S?  The 1099-S document is generally filed with the IRS, and therefore, the party(ies) on that document will need to report the sale of the home on their return.   If only one party is listed on the 1099-S, and given what you have included in your post, that party would be considered to have nominee income.  Pursuant to IRS guidance regarding nominee income (income received in your name but that belongs to someone else) such person must file a 1099 with the IRS and provide a copy of same to the other owner(s). In other words, the other owners would get a 1099 reflecting their pro rata share of the sale proceeds.  Below is the IRS guidance on this issue.

f you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. You must file a Form 1099 with the IRS (the same type of Form 1099 you received) for each of the other owners showing the amounts allocable to each. You must also furnish a Form 1099 to each of the other owners. File the new Form 1099 with Form 1096 with the IRS Submission Processing Center for your area. On each new Form 1099, list yourself as the “payer” and the other owner as the “recipient.” On Form 1096, list yourself as the “Filer.” A spouse is not required to file a nominee return to show amounts owned by the other spouse. The nominee, not the original payer, is responsible for filing the subsequent Forms 1099 to show the amount allocable to each owner.

The above information was obtained from the following link:

General Instructions for Certain Information Returns (2022)

@MMM35 

[Opus 17]

Being on the loan is no big deal, but being listed as a co-owner on the deed means that the IRS will default to the expectation that the property was co-owned in equal shares and the capital gains are also equally distributed.  However, this may be a rebuttable presumption.  The Turbotax expert gives a worst-case scenario, but you may want to see an accountant to get a local, professional opinion and assistance.  

[beauone]

What if one of the parties is only on the title, not on the loan.  Could I simply get off the title to avoid capital gains or is that considered a gift.

[VictoriaD75]

In order to remove yourself from the title, your share of ownership needs to be transferred somewhere. That could be considered a gift if no consideration is given for the transfer. Even if there are only two owners on the title, removing your name now assigns 100% ownership to the remaining party. As expected, a sale of your ownership could result in capital gains.

@beauone