Your taxable gain (or tax-deductible loss) on a tenant in common property should be in exact proportion to your respective percentages of ownership in the underlying property itself. Tenancy in common ownership is unlike that of a typical business partnership, where the various partners can, by separate written agreement, split up their income, taxable gains, losses, and distributions in any manner they choose. A tenant in common ownership structure is more rigid, and less flexible, than is a partnership.
How do you figure out the percentage of ownership, then, if you and your co-investor(s) don't have a written agreement from the outset? Well, to answer that we would look back to the original purchase documents, or inheritance, or however the property came into your joint ownership.
For example, say that back in 2005, you and your co-owner bought some real estate (vacant land) for a price of $100,000. If you put up $60,000 toward the original purchase, and your co-investor put up $40,000, and the property is titled as tenants in common, then you would split the eventual net sales price between you 60 / 40. Thus, keeping these same numbers as an example, if you sold the land in 2016 for $90,000, then we would allocate that between two investors as follows. ($90,000 x .60) = $54,000; and ($90,000 x .40) = $36,000 (where the total of $54K + $36K = $90K).
For income tax reporting purposes, your long-term capital loss would be ($60,000 - $54,000 😃 $6,000; and your co-investor's loss would be ($36,000 - $40,000) = $4,000.
Of course, these figures could and would change if your original cost basis didn't remain the same from beginning to end. For instance, if you "improved" the property by erecting a building or other structure on it, and did so with your co-investor(s) by contributing capital disproportionately (or differently than your original 60 / 40 investment), then you would have to refigure the eventual gain / loss, according to the principles explained above.
Finally, one other important thing to note is that you always need to coordinate your tax reporting for IRS purposes with your co-investor. If the net property sale is represented by the letter "C," and the individual investors by the letters "A" and "B," then we must make sure that what gets reported to the IRS at tax time is A + B = C.
Hopefully that logic and reasoning makes sense. Tenancy in common is really a straightforward legal structure that provides for fractional ownership in property. It honestly is less confusing, and therefore easier to manage, than some of the other alternatives.
Thank you for asking this important question.
