Taxes on Vacation Home Sale in 2021

[Sandpiper747]

Hi, I sold a vacation home in 2021 for a profit. The home was owned by three people in my family. All three of us were on the deed prior to sale, but only one person on the mortgage (we'll call him person D). We are all in different tax brackets.  Who pays the capital gains taxes on this sale? Person D because on mortgage, or, is it split, and if so, what percentage would each party pay? Here's some additional information to help...

• The house was new construction and about 5 years old when sold
• We (the three parties) put a lot of work into it, which we can prove. I know this can be deducted when filing this year
• All parties live in Delaware but the house is located in Poconos, PA
• We never rented, it was used strictly for family vacation
• No written agreements between parties was drawn up, because we are family

Thanks much! Chris

[melj1]

Hi, 

Your second residence (such as a vacation home) is considered a capital asset. Use Schedule D (Form 1040), Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets to report sales, exchanges, and other dispositions of capital assets.

Each of the three owners will need to report the gain in their ownership share. The sale price is what you sold your proportionate share of the property for. The cost is your proportionate share of the construction costs and any improvements made. Mortgage will not enter in the gain or loss on the property, as it was a vacation rental.

Mel

[VincentL]

If the property is owned equally then each owner will report their share of the proceeds on their tax return (33 .33% each). The mortgage can be a factor in ownership, if any estate or gift taxes issues arise. For example, mortgagee/owner of the property gifted 66.66% to relatives. Capital improvements increase the cost basis of the property when calculating gain.

When you sell a vacation home that you haven’t ever rented out, the taxation will be similar to that of a second home. The taxes will be calculated based on the sale price, less what you paid for the property (your cost basis). Just like a second home, the tax rate will be based on whether the property was held for more or less than a year. The IRS considers a vacation home a “personal capital asset.”

[Sandpiper747]

Thanks, how would we prove the ownership percentage if we only had a verbal agreement? Is it assumed it would be 33.33% equally if no written contract was produced? Can we still draft up a contract, now, after the fact? Person D held primary interest in the property (mortgage was paid through him).

[VincentL]

It is okay to have a verbal agreement among the parties stipulating what the ownership and profit percentages were. It is never assumed to be equal. I am not an attorney, so I cannot opine on drafting a document after the sale.