I "bought" interest in my partner's home by refinancing his mortgage

[sunydaz]

I moved in with my partner in 2002 in a home he purchased new and owned since 2000.  In 2016, he/we refinanced so I could "purchase" half interest in the house and get my name on the property deed.  The home had more than doubled in value.  His original mortgage was $330k, and the property value was approximately $950k in 2016.  The refinance amount was $390k.  This year, we sold the home.  How do we (filing individually) report the purchase price for capital gains purposes?  Does he claim the original $330k, and  I claim the $390k (b/c that is how and when I obtained ownership)?  Do we split the original $330k purchase price?  Do we split the value of the home at the time of refinance? How does this work?

[RSUMan]

A capital gain is Proceeds minus Selling Costs minus Basis.

The Basis in the property is the original purchase price plus improvements (for example, a deck was added that cost $10,000).

The amount of the mortgage is some indication of what the Basis of the property is but is not dispositive.

Was there a Form 1099-S issued in connection with the sale?  Did that form allocate the proceeds between each of you?

Do you have an agreement as to allocation of sale Proceeds?

If you both own a 50% undivided interest as evidenced by the deed in the land records, then the presumption will be 50% of Proceeds minus 50% of Basis will be the gain.

If you have lived in the home 2 of the last 5 years, then you can exclude the first $250,000 of the gain.

[DashonnonH]

Hi Sunydaz, I hope our day is going well. Adding to the previous answer...

Assuming "purchase" means adding you to the deed (and no funds were exchanged for the property received), your partner has gifted you a portion of the home that he purchased. In this case, a gift tax return may have been required for that tax year.

https://turbotax.intuit.com/tax-tips/estates/the-gift-tax/L1sFpFeXV

Your situation is referred to as "joint tenancy" or "tenancy in common". Usually you would have an agreement in place as to what percentage of the home is owned by each person. Your partner's basis would be the amount originally paid for the home (including certain closing cost) plus cost of improvements made to the home. But, because he has gifted you a portion of the home, his basis is determined by the agreement you have in place. 

The percentage each person owns is decided by the ownership agreement made between you and your partner. Your cost basis would be a portion (determined by your percentage of ownership) of the original cost plus cost of improvements (not repairs) made to the home. 50% ownership equals 50% cost basis. 

https://turbotax.intuit.com/tax-tips/home-ownership/real-estate-tax-tips-owning-property-as-a-tenanc...

[RSUMan]

Clarifying my post above:

The amount of a mortgage does not necessarily equal the Basis in the property.  Basis is purchase price plus some closing costs plus improvements.

In order for something to be a gift under state law, you generally must have Delivery and Donative Intent.  Not clear that participating in a refinance and going on the deed is a gift or simply an agreement to share in future liability and future sale proceeds.

Whatever the intent and agreement of the partners, the sale Proceeds, closing costs, and Basis in the property will have to be allocated to the two tax returns.

It is good practice to document the allocations and the reasons for such allocations so you can show at any future date that you made a good faith effort to treat the sale transaction properly.