Tax implications of co-borrowers selling

[nterthaw]

If two people are on a mortgage loan and decide to sell, who is eligible for non-taxable profit?

One person on the loan has fulfilled the requirements to make the profit from the sale non-taxable as laid out in https://turbotax.intuit.com/tax-tips/home- ownership/tax-aspects-of-home-ownership-selling-a-home/L6tbMe3Dy, but the other has not. Is the first person eligible for non-taxable profit on their share, or will they both have to pay taxes because the second person did not fulfill the requirements?

In state of Texas.

 

[FlyingRon]

You have to be careful with your terms. The LOAN doesn't have anything to do with the taxable "profit" from selling a property. The capital gain from selling the property is the basis of the property (the original purchase price plus improvements) subtracted from the sales price (less the sales expenses). This is apportioned to the OWNERS of the property. Any coborrower/cosigner on the loan is not involved here.

If the OWNER of the property used it as his principal residence for 24 out of the 60 months prior to the sale, he can exclude $250,000 of the gain (provided there isn't any non-qualifying use in the time such as rentals, rental adds issues not only for the exclusion but for depreciation recapture).

Now if the non-OWNER is given some of the proceeds under some agreement, then they not only is that 100% taxable, it's taxable as regular income.

Now if the person who you mention as "coborrower" is also a coowner (i.e., on the deed), then what happens is the person who is eligible can exclude up to $250,000 of their share of the gain (typically half), and the other person who doesn't qualify must pay capital gains tax on their entire portion. The capital gains rate is often less than the normal income rate (depending on how long the property is held and what the income of the person is).

 

[LdiJ]

You have to be careful with your terms. The LOAN doesn't have anything to do with the taxable "profit" from selling a property. The capital gain from selling the property is the basis of the property (the original purchase price plus improvements) subtracted from the sales price (less the sales expenses). This is apportioned to the OWNERS of the property. Any coborrower/cosigner on the loan is not involved here.

If the OWNER of the property used it as his principal residence for 24 out of the 60 months prior to the sale, he can exclude $250,000 of the gain (provided there isn't any non-qualifying use in the time such as rentals, rental adds issues not only for the exclusion but for depreciation recapture).

Now if the non-OWNER is given some of the proceeds under some agreement, then they not only is that 100% taxable, it's taxable as regular income.

Now if the person who you mention as "coborrower" is also a coowner (i.e., on the deed), then what happens is the person who is eligible can exclude up to $250,000 of their share of the gain (typically half), and the other person who doesn't qualify must pay capital gains tax on their entire portion. The capital gains rate is often less than the normal income rate (depending on how long the property is held and what the income of the person is).

The co-owner would not have to pay tax on their entire portion. They would only pay tax on their share of the capital gain. I think that is what you intended to say, but it sounded more like you were saying that they had no basis in the property.

 

[FlyingRon]

The co-owner would not have to pay tax on their entire portion. They would only pay tax on their share of the capital gain. I think that is what you intended to say, but it sounded more like you were saying that they had no basis in the property.

Indeed, that is what I meant. The entire portion of their share of the capital gain apportioned to them.
Thanks for the clarificaiton.

 

[nterthaw]

Thank you both - you correctly interpreted what I intended to convey.