how to split capital gain tax with partner

Question

I bought a building with a partner several years ago. But the building and loan were both under my name. My partner was not on any official record. Recently we sold the building. I'm just wondering how to handle the capital gain tax between me and my partner. Thanks!

Bill B. · Answer

You should really hire and talk to a CPA/tax professional. I don’t know how the IrS would feel about you writing someone a large check with no one declaring any taxes being due.

If you don’t have one search BP. There are several knowledgeable experts here. You’ll see the same names pop up to answer complicated questions though I don’t know how hard it would be to hire them for just this function.

Ashish Acharya · Answer

@Ting Liu Since the building and loan were in your name, the IRS considers you the sole owner for tax purposes, meaning you’re responsible for the full capital gains tax. You can settle privately with your partner based on your agreed ownership split, but you will handle the entire tax liability. After paying the tax, you can transfer the proceeds to your partner.

However, Technically you should have filed partnership tax return where he would have recognized his portion of yearly activities and sale at the end.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

Account Closed · Answer

So lucky for you partnerships dont actually need to be filed with the state, they can even be oral in nature. What would need to happen is your tax pro would need to assist with a 1065 partnership return for both of you (ideally) to ensure its being done right. There is no magical way for him to receive the income either, you can simply just pay it to him from the bank account. It all comes down to how its characterized on the tax return and 1065

Jason Malabute · Answer

Hey Ting,

So even though the property and loan were under your name, the IRS looks at beneficial ownership, not just whose name is on the title. That means both you and your partner are considered owners for tax purposes.

If you have a Partnership Agreement, that should be your go-to for figuring out how to split the capital gains. The agreement would outline how profits, losses, and ownership interests should be divided, which will guide how you allocate the gains.

It might be worth chatting with a tax pro to get everything squared away which it sounds like you already did.

Joshua Thompson · Answer

Of course and good luck! A good sit-down conversation with the tax professional should shed some light on the topic and help you determine the next steps.

Ting Liu · Answer

Thanks for everyone's advice! I will hire a tax accountant to handle the matter.

Arn Cenedella · Answer

@Ting Liu

Since property was in your name only, I doubt any partnership return was filed.

Did you form an LLC with your partner? Do you have an EIN? If not, I’d bet there was no partnership return.

Assuming a 50/50 split, you should take half of all income, expenses and profit and report that on your return. And your partner should do the same.

Hopefully your partner is trustworthy and Will dutifully report his profit in his return.

Another possible approach would be to issue your partner a 1099 for half the profit. In that way, there will be an official trail of the agreement.

Of course, best answer is consult CPA.

Ting Liu · Answer

Thanks for the advice! We never filed any partnership return. That's a huge mistake. I don't know what to do now. May I pay the entire tax and give my partner the half of what is left?

Joshua Thompson · Answer

This can be fairly straightforward, depending on your agreement and if a partnership return was ever filed, you'll want to report half or your portion of the basis in the property as well as half the sale price minus expenses. This should quickly calculate your half and their half to  report. Now depending on how this property was reported in the past, the agreement the two of you made, and possibly other factors this answer can change.

how to split capital gain tax with partner

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