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Can Capital Gains be of Joinly Owned Property be Allocated to One Person

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  • 08-14-2014, 08:01 PM
    beekrock
    Can Capital Gains be of Joinly Owned Property be Allocated to One Person
    My question involves real estate located in the State of: Pennsylvania

    My wife and I are looking to purchase a SFH to rehab and flip. We want the gains from the sale to go to me for tax purposes. We originally had the idea of me buying the property and having the deed solely in my name, with her using her underwriting-friendly financials as a cosigner/co-borrower. From what I've been told by one lender, any co-borrower has to be on the deed as well, so I don't know if that will work

    In that scenario, if a jointly owned property sells with a gain, is there a way to designate that gain to a specific owner? Or, does the IRS treat it as an automatic 50-50 split? We'd like to stay away from doing this through an LLC in case we decide to rehab the house and stay there for a few years (to take advantage of the exclusion).

    Any ideas?
  • 08-14-2014, 09:26 PM
    adjusterjack
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    Quote:

    Quoting beekrock
    View Post

    Any ideas?

    Yes.

    Consult a tax pro before you buy it.
  • 08-15-2014, 03:24 AM
    llworking
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    Quote:

    Quoting beekrock
    View Post
    My question involves real estate located in the State of: Pennsylvania

    My wife and I are looking to purchase a SFH to rehab and flip. We want the gains from the sale to go to me for tax purposes. We originally had the idea of me buying the property and having the deed solely in my name, with her using her underwriting-friendly financials as a cosigner/co-borrower. From what I've been told by one lender, any co-borrower has to be on the deed as well, so I don't know if that will work

    In that scenario, if a jointly owned property sells with a gain, is there a way to designate that gain to a specific owner? Or, does the IRS treat it as an automatic 50-50 split? We'd like to stay away from doing this through an LLC in case we decide to rehab the house and stay there for a few years (to take advantage of the exclusion).

    Any ideas?

    What is your reason for wanting the gains assigned to you for tax purposes? Off the top of my head, I cannot see any reason for that. Do you and your wife not file joint returns? If so, why not?
  • 08-16-2014, 07:20 PM
    Bubba Jimmy
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    If you hold the property as tenants in common rather than as joint tenants then you can own different percentages. The percentage is usually based on how much each individual contributes toward the purchase price. That may or many not be helpful to your situation since you are financing and relying on your spouse's credit, but that's all I can think of. If you'd care to answer the questions posed previously you might receive more helpful comments.
  • 08-16-2014, 08:28 PM
    flyingron
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    NO Jimmy, you own percentages based on what it says on the deed JOINT or TENANTS IN COMMON. If no apportionment of shares are made, you are presumed to have equal shares in ownership. A joint owner can always convert (unilaterally) his interest to tenancy in common.

    As far as the IRS is concerned as long as 100% of the gain is apportioned to one or more of the owners they're happy. Note that a gain from someone in the business of flipping is NOT a capital gain, it's ordinary income.
  • 08-17-2014, 03:41 AM
    llworking
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    Quote:

    Quoting flyingron
    View Post
    NO Jimmy, you own percentages based on what it says on the deed JOINT or TENANTS IN COMMON. If no apportionment of shares are made, you are presumed to have equal shares in ownership. A joint owner can always convert (unilaterally) his interest to tenancy in common.

    As far as the IRS is concerned as long as 100% of the gain is apportioned to one or more of the owners they're happy. Note that a gain from someone in the business of flipping is NOT a capital gain, it's ordinary income.

    Assuming that the "flip" takes less than a year.
  • 08-17-2014, 07:19 AM
    Bubba Jimmy
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    Quote:

    Quoting flyingron
    View Post
    NO Jimmy, you own percentages based on what it says on the deed JOINT or TENANTS IN COMMON. If no apportionment of shares are made, you are presumed to have equal shares in ownership. A joint owner can always convert (unilaterally) his interest to tenancy in common.

    As far as the IRS is concerned as long as 100% of the gain is apportioned to one or more of the owners they're happy. Note that a gain from someone in the business of flipping is NOT a capital gain, it's ordinary income.

    Joint Tenants always own an identical and equal portion of the property and equal rights to the entire property – if there are two tenants, they each own 50%, if there are four, they each own 25%. Tenants in Common can specify ownership interests. Can you cite some authority that states otherwise? I don't mind being corrected if the correction is actually true.

    It would be hard to argue that flipping a single house constitutes being in the renovation business.

    The IRS' position is that you should allocate gains according to ownership interests unless you are in a community property state. Otherwise, I could be in a very high tax bracket and push a capital gain to my wife's separate return and have it taxed at the zero percentage rate. That is not allowed. It is no different for a house than it is for a joint stock brokerage account.
  • 08-17-2014, 07:25 AM
    flyingron
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    You are correct, I am sorry. In Pennsylvania, there must be a unity of interest in joint tenancy. That's not universal (for example Connecticut allows otherwise).

    I didn't argue one house was a business, it was just a warning that if they were engaging in such a business that this would be income rather than capital gains (yes provided it's not held for longer as an investment/rental use). However, most people use "flipping" for shorter term than that.
  • 08-17-2014, 07:36 AM
    llworking
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    Quote:

    Quoting flyingron
    View Post
    You are correct, I am sorry. In Pennsylvania, there must be a unity of interest in joint tenancy. That's not universal (for example Connecticut allows otherwise).

    I didn't argue one house was a business, it was just a warning that if they were engaging in such a business that this would be income rather than capital gains (yes provided it's not held for longer as an investment/rental use). However, most people use "flipping" for shorter term than that.

    I agree, but its not uncommon for a "flip" to take longer than a year, for one reason or another.
  • 08-17-2014, 08:11 AM
    Bubba Jimmy
    Re: Gains on Jointly Owned Real Estate -- Can They Be Designated to One Person
    It once took me just under a year to flip a house, but the capital gain was not a concern because I'm a bad enough investor that I had plenty of capital loss carrying forward to cover it :wallbang:
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