Reporting tax gain of jointly-owned condo

[m2m]

Hello,
Jointly (JTWROS) owned condo sold by sisters Ann & Bea. Bea had no financial contribution at all – not to the purchase, condo fees, maintenance, taxes. Sale made by both as sellers and both reported as transferrors on 1099S. On separate tax returns, are all amounts on 8949 for cost basis, depreciation and gain split up?

All 1098s for 15 years of ownership were only in the name and SSN of Ann, who paid mortgage and real estate taxes. These tax deductions were obviously taken only by Ann.  Only one owner/SSN for 1098s and tax deductions; now two 8949s with gain split up by two SSNs/owners. Any IRS impact? Will this create that much-dreaded audit?
Thank you.

[mwcpa]

who got the cash....?

Example...

A and B "own" a business property. A was the one who paid all expenses, collected all profits over the years.  B only was an owner in name, never collected a dime, did any work, invested any money.

On sale, A gets all the money...

A 1099 is issued to both, A and B, showing 50% of the proceeds.

How to address...

A shows 100% of the proceeds, 100% of the adjusted basis, and pays all the tax...

B shows the 50% on their 1099... then shows cost equal to that amount.... noting on the line "nominee" to A

It is clear that B had no financial interest in the property based on the facts, provide this could be documented any question from the IRS should be explained easily.

But, if B got money, then B must report some gain.

I have a client who owns a rental property, initially it was owned by her and a friend... the friend never kicked in a dime... never put up money for the down payment... never did a thing... the mortgage though listed the friend first.... and the 1098 listed the friend first.... one year IRS questioned the claim of the mortgage on my clients filings.... we had the proof, all canceled checks, all rental deposits, all expenses, all mortgage payments, etc written on an account 100% owned by my client.... we had the proof, no issues....other than having to answer a question.... still all these years later the client has not changed the legal title (as it would cause the bank some agita)

[m2m]

“But, if B got money, then B must report some gain.”

Unfortunately, A does not have good records; has moved several times, many records/ documents got lost, became extremely disorganized. Condo association not able to help with any documents.
To minimize various several life issues with B, and to simplify matters with the bank, A had bank give B a check for half of gain. A in good conscience cannot have B pay tax on 100% of the amount she got.
So does she report half of cost basis in order to cut the taxable amount

Thank you kindly!

[mwcpa]

Let's think about this logically...

Property was 1,000,000.  Sold for 1,500,000.  Down payment was 250,000.  Mortgage was 750,000 and at the time of closing it was 400,000.  Cash proceeds, after mortgage pay back at close is 1,100,000.

A and B....

A paid the entire down payment of 250,000.  A paid all of the mortgage principal of 350,000.  so A is all in for 600,000 in cash.

B paid nothing... so B has invested zero cash.

A gets 1/2 of he proceeds... B gets 1/2 of the proceeds....

So, you propose that in "good conscious" that A pays tax on 1/2 the gain....

Proceeds to A 750,000.  Cost basis (assuming good conscious) 500,000.  Gain 250,000.  Tax (assuming current tax rates, federal only... 15% + 50,000 @ 3.8%) or 47,000.

Proceeds to B 750,000. Cost basis (assuming good conscious) 500,000. Gain 250,000. Tax (assuming current tax rates, federal only... 15% + 50,000 @ 3.8%) or 47,000.

Now, let's look at the financial reality.

A paid down payment of 250,000.... A paid all mortgage payments 350,000.... A paid tax of 47,000.... Total money paid 647,000.  Cash received at sale 550,000.  A has an overall economic loss of 97,000.

B paid down payment of 0.... A paid no mortgage payments 0.... B paid tax of 47,000.... Total money paid 47,000. Cash received at sale 550,000. A has an overall economic gain of 503,000.

Is that fair to A?

Give A the benefit of their true economic loss and let B pay their tax on their true economic gain.  In my opinion in good conscious, B should thank A for the huge gift.

[m2m]

Thank you MW!

Wow - I wish it was big numbers like that! Forgive me - the numbers hurt my little half-heimer's brain.  Please, pretty please teach me again with the below numbers:

Condo bought many years ago for 60, cash. Improvements, condo assessments ups cost basis to 128. Sold for 383K.  Gain of 255 with small SS income and RMD  - puts A in that supposedly rich higher taxed 250+ income. That's a big tax bite for A alone.  So sharing cap gain with B is a tax benefit for A.  A shared the proceeds because she feels obligated to help B, who is a sister who really needed/help from A - the only relative. Just old fashioned elderly folks.
(53 in real estate taxes through the years paid by A, but were claimed as tax deductions)

Thanks ever sp much for your kindness,

[mwcpa]

that does not change the fact that B must pay tax on 100% of what was received, as explained previously.... if A gifts his/her share now, that is still A's income tax.....

Let's assume 20K is SS income and 10K in RMD... add in the gain for A, based on your plan (which would be lost under tax audit)..... long term gain of 255....split 50/50.... (again, B has ZERO tax basis in reality, you cannot just allocate it to avoid tax)

Under your plan... A's tax would be 18,346 in 2013....

Under the proper plan and true economics of the transaction, A's gain is proceeds, 383K/2=191.5K.  Tax basis is 128K, they paid it all.  Gain 191.5K less 128K =63.5K... all other assumptions above are the same... 8,746.

The gain is properly noted as this following:

	Total	A	B
Proceeds	383,000	191,500	191,500
Cost basis	128,000	128,000	0
Gain	255,000	63,500	191,500

[m2m]

Good morning MW and thank you!

So - if A does not gift B :
        then A’s total gain is 255,000, fed cap gains tax would be
        38,250 ( 255,000 x 0.15%) + 2090 (55,000 x3.8%) = 40,340
       
        Add another approx 6.3% tax to NJ

        And fed + NJ income tax on 45K (SS & RMD)

       Will AMT also hit on all these dizzying numbers?

Please, please "Un-dizzy" my confused little brain.  The visual presentation that you do makes numbers so much easier to understand. 
Thank you, thank you so much!

[mwcpa]

I am really confused... you said A already gave B 1/2 the proceeds as B "owned" half the property...

The issue is solely the basis allocable to A and B..... B has zero basis.... A has the entire basis of 128K.... A has a gain of 63.5K..... B has a gain of 191.5K...

[m2m]

I am so sorry - I got me so totally confused.  I was just trying to understand what the numbers would have been if the half was not 'gifted' - like in the end - what was the 'true' cost of the 'gift'. I thought I had deleted the message. Again thank you so very much for your time and patience!