How to report paying off your kids partial ownership on your home when you refinance with cash out to pay your kid off

[jimmy_blanco]

In 2015, my wife and I purchased a condo with our daughter for $525K, with her listed as 50% owner.  I put the entire down payment and we obtained a loan for $395K. 

My daughter was to paid 50% of all home expenses, including the mortgage, in return to be able to claim 50% of the interest and home taxes on her income taxes; which she did until she relocated to another town in mid 2017.  At the time of her move, we looked at Zillow’s estimated value of the condo ($625K) and agreed that she was entitled to 50% of that amount ($50K), which we would hold until the time she decided to buy her own place.

On Oct 2019, I refinanced the loan for $390K and cashed out the $50K to pay off my daughter.  She used that money as down payment on a new condo on Oct 2019 and we gifted her another $15K to complete her transactions.

My questions are about both my income taxes and my daughter’s on this transaction alone:

1. What are mine and my daughter’s filing requirements on this transaction?
2. What is the most advantageous way to report this transaction? Sale?  Gift?
3. Should this be treated as a home sale even though I never sold the place, just refinanced it? Or should I treat the entire amount as a gift

[RobertG]

This does not seem in any way to be a business arrangement, I would report the whole amount as a gift.

As the recipient of the gift, your daughter reports nothing.

In 2015 you made a gift to your daughter of 50% of the property.  The value of the gift was 50% of the down payment.

In 2017 you agreed to buy her out for $50,000 for 50% of the property appreciation, the payment to come at some indefinite future date.

I would treat the amount you gave her in 2019 as an additional gift.

[NCperson]

but since you cashed out the loan, the interest related to the $50k may not be tax deductible. 

[jimmy_blanco]

Do I need to fill any forms for that?  Back in 2026 and again now?

 Since I never gave her any portion of the down payment, we kept it all.  The 50k was half of the equity the unit increased in value during the time we were sharing the bills.  Why do i Need ti report half the down payment as the gift and not the 50k only

[NCperson]

you bought the house for $525k and look out a  loan for $395k.  Half that equity or $65,000 is the gift.  the property appreciated to $625k.  

She sold you her half for $312.5k against a basis of $262.5k  She profited $50,000 which may be taxable.  You didn't provide enough details to figure that out.  

then you inferred that the balance on the mortgage dropped to $345k and you did a cash out refi for $395kThe related interest on that $50,000 may not be tax deductible.

Did she live in the condo? how long? 

what are you doing with it now? 

[jimmy_blanco]

Appreciate you taking the time to understand my case and provide insight into it.  Apologize for the lack of details.  Let me clarify and add the missing details. 

i had lost my job that year and had to sell my previous home and did not qualify to buy a new one alone with my wife.

The deal we made with our daughter was that she put her income as collateral to the 395k loan we took to buy the $525k condo and she agreed to pay half the bills, including the mortgage while she lived with us, in return for 50% of the deductions and 50% of the equity the condo increased while she lived with us and paid her share of the bills. 

she lived with us a little o over two years and moved in 2017 120 miles away.  At that time, we agreed that the home had increased $100k in equity and we were to split that profit in half.  She asked us to keep her money until she was ready to buy her own condo. 

Last October she asked for her $50k and we had to refinance and cash out in order to pay her off. My wife and still reside at the condo and my daughter at her new condo

 if I treat this transaction as a gift, when I do my condo I MSU have to pay taxes on her $50k of her share as it el reported ad profit to me

[NCperson]

there is no capital gains tax as she lived at the condo for at least 2 of the past 5 years. 

The equity you gave her was a gift. 

However, the interest related to the cash out, is not tax deductible.