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Capital gains taxes for the LE and Rem. on the sale of investment property.

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rf53

Junior Member
What is the name of your state (only U.S. law)? Florida

My sister and I own an investment property which we are selling. On the deed, my sister is listed as having a life estate, and I am the remainderman. We plan to split the proceeds 50-50. Both of us will be subject to 15% capital gains and the 3.8% Medicare surtax:

Q: Do we report the sale and submit the capital gains tax due on her tax return, or on both of our tax returns (50-50)?
Q: If the sale/taxes due are reported on both tax returns (50-50), how do we document the 50% split on the returns?

Thank you!
 


LdiJ

Senior Member
What is the name of your state (only U.S. law)? Florida

My sister and I own an investment property which we are selling. On the deed, my sister is listed as having a life estate, and I am the remainderman. We plan to split the proceeds 50-50. Both of us will be subject to 15% capital gains and the 3.8% Medicare surtax:

Q: Do we report the sale and submit the capital gains tax due on her tax return, or on both of our tax returns (50-50)?
Q: If the sale/taxes due are reported on both tax returns (50-50), how do we document the 50% split on the returns?

Thank you!
You simply divide the basis in half and divide the proceeds in half and report them on your individual tax returns on schedule D.
 

rf53

Junior Member
You simply divide the basis in half and divide the proceeds in half and report them on your individual tax returns on schedule D.
Thank you for your quick reply. I assumed that was the case. What documentation is necessary to show the transaction, and the fact that the proceeds were split evenly? I assume the IRS will require proof of the fact that we each received 50% of the equity, and are liable for 50% of the LTCG. How do we show that?
 

FlyingRon

Senior Member
The EQUITY and "proceeds" has squat to do with it. The tax is paid on the difference between the basis and the sales price. Further, you don't say what sort of "investment" this was, but it's also possible that there is depreciation recapture involved here. The IRS is less concerned how the sales check got split in practice than just making sure that 100% of the gain is taxed.
 

LdiJ

Senior Member
The EQUITY and "proceeds" has squat to do with it. The tax is paid on the difference between the basis and the sales price. Further, you don't say what sort of "investment" this was, but it's also possible that there is depreciation recapture involved here. The IRS is less concerned how the sales check got split in practice than just making sure that 100% of the gain is taxed.
I was assuming an inheritance of some sort and a stepped up basis, due to the life estate. If that is not the case then yes, depreciation recapture might very well be an issue.
 

rf53

Junior Member
The EQUITY and "proceeds" has squat to do with it. The tax is paid on the difference between the basis and the sales price. Further, you don't say what sort of "investment" this was, but it's also possible that there is depreciation recapture involved here. The IRS is less concerned how the sales check got split in practice than just making sure that 100% of the gain is taxed.
Thank you. That much I understand. To calculate the LT capital gain (what I called proceeds in the other post) the original price paid for the property, closing costs for the current sale, attorneys fees, and qualifying deductions over the years will be subtracted from the current sales price. There will be no realtor commission because it is a sale directly to another private party. It is undeveloped land...no structures or other complications. We are not reinvesting the money. Also, this property has never provided an offset to ordinary income for either LE or the Rem.

You mentioned that, "The IRS is less concerned how the sales check got split in practice than just making sure that 100% of the gain is taxed." My question/concern is based on making our returns clear on that point.

Now that I know each of us should report the gain 50-50 on our returns, and now that we are clear on the fact that the gain has been calculated accurately, what documentation should be submitted with each return to provide proof to the IRS that the gain was calculated accurately, split equally, and that the long term capital gains tax from this sale is being paid equally by both of us?
 
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LdiJ

Senior Member
Thank you. That much I understand. To calculate the LT capital gain (what I called proceeds in the other post) the original price paid for the property, closing costs for the current sale, attorneys fees, and qualifying deductions over the years will be subtracted from the current sales price. There will be no realtor commission because it is a sale directly to another private party. It is undeveloped land...no structures or other complications. We are not reinvesting the money. Also, this property has never provided an offset to ordinary income for either LE or the Rem.

You mentioned that, "The IRS is less concerned how the sales check got split in practice than just making sure that 100% of the gain is taxed." My question/concern is based on making our returns clear on that point.

Now that I know each of us should report the gain 50-50 on our returns, and now that we are clear on the fact that the gain has been calculated accurately, what documentation should be submitted with each return to provide proof to the IRS that the gain was calculated accurately, split equally, and that the long term capital gains tax from this sale is being paid equally by both of us?
No documentation should be submitted with the tax returns. The documentation from the closing on the property should be kept by both of you in the event that you are audited.
 

rf53

Junior Member
No documentation should be submitted with the tax returns. The documentation from the closing on the property should be kept by both of you in the event that you are audited.
Thank you for your prompt assistance! This is not directed at you... you have been great... that sounds silly enough to be true. In this case the long term capital gains taxes will be over $190K which will be filed on two unrelated 1040's that will be unlinkable (is that a word?) without something to connect the dots. I find it shocking that the IRS would simply trust the fact that we did everything correctly without documentation, since without it there is no way they could reconstruct the sale and justify the accuracy our returns. Is there any benefit to attaching documentation showing the sale price, the calculation of the capital gain, and the 50-50 split to give them a clue about why we are each submitting almost 100K in LTCG's, or do they just trust, and sometime verify via audit?
 

LdiJ

Senior Member
Thank you for your prompt assistance! This is not directed at you... you have been great... that sounds silly enough to be true. In this case the long term capital gains taxes will be over $190K which will be filed on two unrelated 1040's that will be unlinkable (is that a word?) without something to connect the dots. I find it shocking that the IRS would simply trust the fact that we did everything correctly without documentation, since without it there is no way they could reconstruct the sale and justify the accuracy our returns. Is there any benefit to attaching documentation showing the sale price, the calculation of the capital gain, and the 50-50 split to give them a clue about why we are each submitting almost 100K in LTCG's, or do they just trust, and sometime verify via audit?
Anything that you attach to the tax return is likely to get discarded. They tend not to want to see your "proof" until or unless they ask for it.

You could certainly attach an unformatted statement (can be done for e-filing or mailing) explaining what has been done, and cross referencing you and your sister's SSNs if you are that concerned about it, however that will not forestall an audit or letter inquiry. Its not like this is an uncommon situation.
 

rf53

Junior Member
Anything that you attach to the tax return is likely to get discarded. They tend not to want to see your "proof" until or unless they ask for it.

You could certainly attach an unformatted statement (can be done for e-filing or mailing) explaining what has been done, and cross referencing you and your sister's SSNs if you are that concerned about it, however that will not forestall an audit or letter inquiry. Its not like this is an uncommon situation.
Understood. Thanks again.
 

FlyingRon

Senior Member
ThTo calculate the LT capital gain (what I called proceeds in the other post) the original price paid for the property, closing costs for the current sale, attorneys fees, and qualifying deductions over the years will be subtracted from the current sales price.
You're using the wrong terms but hopefully you have it right. You can't adjust the basis by "deductions" whether you took them or not. Only capital improvements as well as any costs directly related to the sale (or preparation for the sale) of the property. Other deductions you might have taken over the years don't change the basis. Vacant land doesn't depreciate, so you can forget I mentioned that issue.

By the way, proceeds in IRS speak means the selling price.

As pointed out, you just pay the tax on the gain reported on the schedule D (and possibly an 8949 as well). You list the apportioned amount (your half share).
 

anteater

Senior Member
You simply divide the basis in half and divide the proceeds in half and report them on your individual tax returns on schedule D.
What is the justification for dividing in half? One sibling has a life estate and the other sibling is the remainderman.
 

FlyingRon

Senior Member
What is the justification for dividing in half? One sibling has a life estate and the other sibling is the remainderman.
Life estates have value. The sister is giving up her estate in order to allow the property to be sold unencumbered. The IRS treats this as a capital gain for her.
 

LdiJ

Senior Member
What is the justification for dividing in half? One sibling has a life estate and the other sibling is the remainderman.
It's perfectly justified to decide that the life estate value is 1/2 of the value of the land. Its probably a win-win for the two of them.
 

rf53

Junior Member
You're using the wrong terms but hopefully you have it right. You can't adjust the basis by "deductions" whether you took them or not. Only capital improvements as well as any costs directly related to the sale (or preparation for the sale) of the property. Other deductions you might have taken over the years don't change the basis. Vacant land doesn't depreciate, so you can forget I mentioned that issue.

By the way, proceeds in IRS speak means the selling price.

As pointed out, you just pay the tax on the gain reported on the schedule D (and possibly an 8949 as well). You list the apportioned amount (your half share).
Thank you. I'm sorry I used the wrong terminology, but I am glad that I have it correct in concept. The fact is that since this is undeveloped land, there are no capital improvements. Years ago we did knock down a small uninhabited house that was on the property, and I believe I can apply the cost of that to adjust the basis since this helped to prepare the land for development. Does that sound right?

One final thing... without the gain from this sale my sister and I are both in the 15% capital gains bracket. Applying the gain from the sale moves us to the 20% bracket and also subjects us to the 3.8% Medicare surtax. Am I correct? Does the gain contribute to the income that is used to determine the LTCG bracket, or is it your regular income prior to the gain in the tax year? I think I know the answer already :mad:
 

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