09 Sep Dad and I own a home together. How are we taxed when we sell?

Q. My dad and I purchased a home together in September 2021. We purchased the home with both our names on the title. The home purchase price was 464,000. I mortgaged my half, $275,000, at a 3.25% interest rate, and my father put in the remaining amount of $189,000. We are expected to sell the home in October/November of 2022. I fall in the 15% long-term gains category. I have been paying the mortgage payments $2020 a month and an extra $5,000 for miscellaneous home repairs, and my father has been paying for the remaining renovation costs. Our agreement was to split the profits 65% for my father and 35% for me. If we sell this home for $800,000, how would we each be taxed?
— Son

A. Congrats on what seems to be a healthy short-term profit.

We’re glad you asked about the tax part. It can be complicated when you have two owners who have different shares of a property.

You said you will be splitting the profits on a 65/35 basis.

The profit is calculated by subtracting the cost basis, including carrying and closing costs, from the selling price, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

He said there are two different ways that the taxable profit could be calculated.

It can be calculated in the entirety or by partner.

“If, by the entirely, you would calculate the cost basis by adding up the purchase price, costs for improvements, miscellaneous home repairs, mortgage interest, other carrying costs, and the closing costs,” he said. “Then subtract that from the selling price and multiply the remainder by your percentage.”

The other choice would be to allocate the selling price to each of you by your applicable percentage with each of you having a different basis calculation, Karu said.

“For your father, his basis would include his pro-rata share of the purchase price plus any monies that he paid for the renovation costs plus 65% of the closing costs on the sale,” he said. “For you, your basis would be your pro-rata share of the purchase price plus the monies paid for miscellaneous home repairs plus 35% of the closing costs on the sale plus the interest paid on the mortgage.”

Keep in mind that the share of the profit does not mean your share of the cash from the sale, Karu said.

“The cash flow to each of you is a separate calculation,” he said.

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This story was originally published on Sept. 9, 2022.

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