Partial owner home sale

[babblefiesta]

I bought a house 5 years ago with my wife and her father-in-law. All 3 of our names were on the title/deed since her father-in-law contributed substantially to the down payment. The mortgage was under me and my wife. My wife and I have made all payments for mortgage/taxes etc.. We also rented out a room for a couple years. This is also me and my wife's primary residency.

He has made it clear that the house is ours including any rental income. We just sold the house last year and all the net proceeds from the sale went to me and my wife. How exactly should this be reported? Can I exclude 100% of the capital gains from my income? He essentially gifted the house to us verbally but we never changed the deed.

[DianeW777]

First, it should be reported on your tax return with your wife. How you report it depends on certain factors.

If the house was your home, then you can exclude partial gain if you meet the use and ownership tests.  The depreciation for the room rental will be recaptured and taxable whether or not you actually used that expense on your tax return.  IRS tax law says allowed or allowable (use it or lose it).

• IRS Publication 523
  • Must be your home 2 of the last 5 years and used as your residence (see more in the link above)

Cost basis will be the amount you actually paid for it, and then the portion the father-in-law paid would be the gift portion of the cost basis that you can include. 

Gift Tax Return (2017 Instructions for Form 709): However, if that down payment was greater than $14,000 (assuming 2016 or 2017) then a gift tax return was required to be filed by the giver (father-in-law).  There would be no gift tax paid due to the life time exclusion.

• IRS Prior Year Form Search

If this is not your home then there is no exclusion and it will be a sale of investment property. In either case make sure you have the depreciation expense amount for the rental room period.

[babblefiesta]

Thanks. My wife and I lived there as our primary residency. The gain was $100,000. So because 3 people were on the deed... we can only exclude (67% of $100,000 = ~$67k) and my father-in-law would have to report $33k as taxable capital gain?

[Vanessa A]

If your father in-law received 1/3 of the money, then yes he would have to report it and would pay capital gains on it if he did not live there with you.

If you and your wife received the full amount, then you would report the full amount on your return and your father in law would report nothing. 

[babblefiesta]

Got it. I received 100% of the money so I will report it. 

With regards to depreciation recapture:

I rented a room in the house in 2018 (part of year, lets say 6 months) and 2019 (full year). In 2020, I stopped renting the extra room and that room became personal use.  I claimed depreciation when looking at my prior returns as:

2018 - $5000

2019 - $10,000

Would depreciation recapture simply be $15,000?

[Vanessa A]

Yes, if the depreciation on those returns were $15,000, then that would be your depreciation recapture.