Tax Consequences - Related Parties
Whether you are related or not, capital assets can be owned jointly by husband and wife, brother and sister or even unrelated parties with two or more interested investors or owners. Gains and losses from income produced, or selling the asset, are split proportionally based on the percentage ownership of each individual. Example:
Todd, Matt and Dave (now 40 years old), have been friends since high school. They decide to purchase a parcel of land together that costs $100,000. Matt is going to invest $50,000, Dave $30,000 and Todd $20,000.
Ownership (Basis) for each would be as follows:
Matt 50% - ($50,000/$100,000)
Dave 30% - ($30,000/$100,000)
Todd 20% - ($20,000/$100,000)
Suppose they rent the land to a hot dog vendor in the first year for $8,000, to whom is this income taxed and how much for the first year?
Matt: $4,000 taxable rental income – ($8,000 x 50%)
Dave: $2,400 taxable rental income – ($8,000 x 30%)
Todd: $1,600 taxable rental income – ($8,000 x 20%)
Suppose they sell the land in the third year for $160,000, what is each owner's taxable gain?
Matt $30,000 long-term capital gain – ($60,000 profit x 50%)
Dave $24,000 long-term capital gain – ($60,000 profit x 30%)
Todd $16,000 long-term capital gain – ($60,000 profit x 20%)