If you sell your real estate holdings, you’ll likely benefit from capital gains, which are profits realized from the sale of a capital asset. The downside of those capital gains, however, is the taxes you have to pay, appropriately known as capital gains taxes. Failure to report those gains on your tax return could lead to a fine or other penalties from the IRS.
What happens to capital gains taxes on joint ownership property? Unless you use a tax-advantaged or tax-deferment strategy, you still owe the IRS. You just have to report it differently than if you sold a capital asset as a sole owner.
Defining Joint Ownership
Joint ownership, sometimes known as joint tenancy, or in some cases, co-ownership, means two or more parties own an entire property, and have equal rights to that property. If there are two joint owners, each would own 50% of the property; three joint owners would own 33.33% of the property, and so on.
This differs from another “multiparty” ownership structure, Tenancy in Common, in which two or more entities have equal or unequal ownership shares.
Under joint ownership, financing of the property requires all owners' approval. Also, a creditor attempting to collect a debt from one of the owners could petition the court to divide the property and force a sale to receive money.
Speaking of sales, if joint owners sell a property, each is responsible for capital gains taxes resulting from the disposition. If your joint ownership consists of three entities, all three receive proceeds from the sale, matched to your ownership percentage. And all three of you would need to report capital gains, which are the profits you earn when selling real estate or property.
Share and Share Alike
While there is little written specifically about who pays capital gains taxes on the sale of joint ownership property, the IRS Publication 550 notes that, in general, each owner is responsible for reporting a capital gain or loss on the sale of a real estate asset.
Basically, as part of the return, you would need to report the capital gain (or loss) on Form 1099-B and add information detailing the percentage of your proceeds and initial cost basis. You might also have to add additional information, letting the IRS know that the property in question was jointly owned with the proceeds reflected on the co-owners’ tax returns. To be sure you’re reporting the right information, check with your tax advisor.
Basically, the simple answer to the question about joint ownership of real estate is that you’ll each be responsible for your share of taxes. This is just like when you were responsible for your share of expenses while owning that property.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.