Capitlal Gains On 50% Sale?
Im sure this has been asked quite a few times however cant find the answer to my question..
I recently sold 50% of a property I owned to a friend for $115k. What we did is establish an LLC as partners and we are just going to slide the Deed over to the company. (Im aware of due on sale clause).
My question to you is, do i have to pay taxes on this 115k (cap't gains)? or is Uncle Sam waiting to rear his ugly head when I sell this house off fully?
What is your cost basis in the property?
Since you sold only a 50% interest, subtract half of your basis from $115K to determine your taxable profit or your capital loss. If you owned the property longer than one year, then long term capital gains rate applies to your profit.
Im not quite certain I follow-
This property is a duplex which Ive owned for 6 years. I had originally purchased the property for $135k. Its a cash cow for rent however I needed to get some cash to close on a primary home for myself. So I sold my friend 50% ownership of this property for $115k which is also my payoff amount.
Of course no one knows this ocurred other than a lawyer who is going to transfer the deed. (fyi he took a heloc out to give me the 115k). The loan for the property is still the orginal loan which is under my name solely. I always thought that after a certain age (59) that capital gains changed so if this does indeed mater , I am 30.
Any advice will be appreciated.
Were both units in the duplex used as rentals or did you live in the unit you sold as your primary residence? The answer affects your tax treatment.
If the property was in service as a rental and you sold your friend a 50% interest in the property, then you first need to calculate your cost basis. You purchased the entire duplex some time ago for $135K. If you made any capital improvements, then the cost of those improvements is added to your purchase price. For the sake of this discussion, let's say that you had no capital improvements. Your initial cost basis in this property is $135K, so the half interest you sold would have an initial basis of $67,500.
So, right now your taxable profit on the sale of your half interest is the difference between your basis and your sale price, or $47,500. At a 15% capital gains rate, the tax on your gain from appreciation is $7,125. During your holding period you also took a depreciation expense (or should have taken a depreciation expense). Since the property did not really lose value (depreciate), the allowed depreciation that did not really occur is recaptured. The recapture tax rate is 25%. Just for the sake of discussion, let's say that you were allowed $20K in depreciation for just the half interest you sold. Depreciation recapture adds another $5K to your tax bill, making your total tax liabilility from the sale of 50% of your investment property $12,125. There is no capital gains tax exemption or exclusion on the sale of investment property regardless of your age.
Change the scenario. Let's say instead that you sold the unit that you personally occupied as your primary residence for these past eight years. Since you occupied the unit as your primary residence for the past eight years, you can exclude your profits from capital gains taxation because you meet the two year ownership and occupancy tests. Now, your $47,500 profit on the sale of a 50% interest in the property is tax free.
In response to your original questions, is this a taxable transaction? As you described it, yes. Whether it is a bona fide, legal transaction, I can't say (see below).
You probably did it one of two ways. You may have sold half the property to him and put his name on the deed. In that case, it is a simple sale of a partial interest. If you contributed the property to the LLC, he invested 115k in the LLC, and the LLC distributed the cash to you, it would be considered a sale of the property from you to the LLC (also called a disguised sale). From your standpoint, it's treated the same.
I'm not sure your friend is in the best situation. He paid 115k for half of a property which still has a primary mortgage on it (you indicated 115k as the payoff amount). So, at best, he has paid 115k for only 57.5k of equity (115k pd for 50%, so total FMV = 230k - 115k (first mort) = 115k equity x 50% = 57.5). Not a real good deal. I'm not sure what the legal ramifications are.
appreciate the response. Im not sure Im catching on to what your saying at the end there. Nonetheless, There are some other stipulations with the property value which I didnt get into. The FMV on the house is actually much higher than $230 (had to make it attractive) and the property is kind of special. It has permits attached to it that are no longer available by the city that allows it to be student housing. Even more special it has an 8 student permit which is kind of unheard of. Its brings in 2k per month. So $1000 worth of rent on his 115k & the same for me. Who'd pass that up?
Anyway, I appreciate the responses. This will be a newly formed LLC so I guess in a sense he is paying me as an individual and then it will be moved over.
Would the above examples of capital gain tax apply also to tax deed interest held by an LLC sold to an individual.
Example:
Tax deed for a property is aquired by an LLC for $2000
Tax deed is sold to an individual (non-member of LLC) for $6000.
How would the $4000 of profit for selling the LLC's interest in that particular property be taxed? Would it be calculated the same way as in the example above? Will capital gains tax apply to this situation?