Unmarried couple selling a house years after breakup

[emilyspinach]

My ex and I bought a home in NJ in 2013, paying the mortgage equally.  Then in 2017 we broke up (amicably). I moved out and started renting an apartment in NYC while he stayed in the home and took over the mortgage payments.

Now we are selling the house and I am not sure what I will owe in taxes and what my options are.

I have not lived there myself for 2 out of the last 5 years, but he has.  I will also only receive a smaller portion of the sale proceeds than he will since he lived there longer and put in more money for improvements.

Will I have to pay capital gains? for the whole house or just for the small percentage I am receiving? 

[Mike9241]

I would conclude that when you both bought the house each had an equal share so your initial cost basis is 1/2 the cost including applicable closing costs. To that you would add what you paid for improvements. This is your total tax basis. You will have a capital gain if your share of the sales price you receive less your share of the closing costs on sale exceeds your tax basis. A loss would not be deductible.  

[Hal_Al]

Q. Will I have to pay capital gains? for the whole house or just for the small percentage I am receiving? 

A. Simple answer: for the small percentage you are receiving

You may want to seek tax professional or legal assistance for this situation.

Your capital gain is not based on the "proceeds" from the sale.  That is, the mortgage payoff, if any is irrelevant.  Your capital gain is your percentage of the difference between the sale price (less expenses of sale) and your cost basis. 

It may make a difference in how the money is paid to you.  Will the closing agent be paying you or will your ex spouse be paying you after he receives all the proceeds?   That is, are you selling a capital asset or just receiving a divorce property settlement?  Will the 1099-S be in just his name or both of you?

[emilyspinach]

Thank you so much for your help. 

Since we were never married, there is no divorce settlement.  We are friends and lazy and didn't think about what would happen when we had to sell the house or what we would do until now that we have an offer and are closing soon (I know, so so stupid).  

At the moment, the closing agent is planning to divide the proceeds to both of us (after we agree on what my percentage should be based on how long I paid into the mortgage and any money I added up front when we bought the house).  This doesn't mean we can't do something different if that makes things better/easier and less costly. 

I'd happily sign something to remove myself from the sale entirely and work out something with my ex to be reimbursed eventually? Maybe that isn't kosher though?

[Opus 17]

By default, the IRS will assume you are 50/50 owners, and you each should report half the capital gains.  If audited, you can rebut this presumption, but you need to have records to show them.  For example, if you paid 50% of the down payment and 50% of the mortgage payments until 2017, but did not make mortgage payments after, your ownership interest has been diluted over time.  Or, if the other owner took a cash out refinance and spent the money on themselves, that would also dilute your equity.

Also, remember the proceeds are not your gain.  If you determine that you are 30% owner, your gain is 30% of the selling price minus 30% of the adjusted cost basis.  That might be more than the proceeds, especially if there is an outstanding mortgage.

The IRS does not have to award any adjustments that you can't prove with adequate records.  So if you are audited, you need to show them records and a reasonable argument/calculation about why you own less than 50% of the property.  Keep your calculations and records with your other important tax papers for at least 3 years (6 years is better).