How do you calculate capital gains tax for joint owners?

[streampaw]

Here's the situation. Let's say there's a multi family 4 unit property that is owned by an unmarried couple as joint owners with right of survivorship. They lived in it for two years out of the last 5. They don't live there anymore. 

Person #1 makes 50k a year in income and claims head of household, and person #2 makes 100k a year and claims single. Mortgage is only on the name of person #2. 

They bought the property for 400k and will sell for 700k, creating 300k in gains. 

How do they split the capital gain to pay the least amount of taxes? Do they need to do a 1031 exchange, or is there some way to avoid paying capital gains with this scenario? 

They both lived in 25% of the property (1 unit) for 2 years. The other 3 units were rented out. I assume that means 25% of the gains can be tax free, which means we only need to figure out what to do with the other 75% (225k). But how do they split everything? Can one person claim all the gains? 

For example, I read that if your income is less than 55k as HOH, you don't pay any capital gains tax. Can person #1 with the 50k income just claim the entire 300k gains and not pay any taxes on it? 

[Critter-3]

First you need to establish what you have done in the past ... if you did not file a partnership return and only divided everything 50/50 then you keep up that ratio ... you cannot simply decide to divide things differently to suit yourself on the sale. 

I highly recommend you seek local professional assistance especially if you did not depreciate the property over the years you have owned it.  

[Mike9241]

another issue could be the failure to file partnership returns for the period it was rental property. 

[streampaw]

Partnership returns are not required for this scenario. 

[streampaw]

The property doesn't have any ratios or percentages. Each owner has "equal right" to the whole property, hence joint tenants with rights of survivorship. 

75% of the property was depreciated due to the other 3 units being rented out. 

[Critter-3]

My dear ... you said you have had this property for more than one tax year so you must have reported the income and expenses in the past using some sort of ratio.   If you both own it jointly then the usual split is 50/50 on each person's tax return.   Please seek local professional guidance for this matter to get educated on what you need to know for a jointly owned investment property. 

[Hal_Al]

Q.  I read that if your income is less than 55k as HOH, you don't pay any capital gains tax. Is that true?

A.  No. The  portion of  the  first  $55K of total taxable income, attributable to long term capital gain (LTCG) is taxed at 0%.  Any additional capital gain is taxed at  capital gains rate (15% until total income reaches the next tax bracket) instead of ordinary income rates. 

Q. Can person #1 with the 50k income just claim the entire 300k gains and not pay any taxes on it?

A.  No. For an HOH with $50K of other income (not including LTCG), only about $25K of his capital gain will be taxed at 0%.

Q. They both lived in 25% of the property (1 unit) for 2 years.  I assume that means 25% of the gains can be tax free.

A. Yes, since each person's share of the 25% is less than the $250,000 maximum home sale exclusion amount, regardless of how you split it.

Q. Can one person claim all the gains? 

A.  No, in reporting the sale, you have to follow the money. 

Q. How do they split everything? 

A.  You split the tax reporting in the same percentage as you split the proceeds from the sale.  If the money went into a joint account, then you report the sale 50/50.