Should my name be on the deed?

[Thomas Jackson]

Hello Fellow BP’ers I have a question that I’m sure someone can shed some light on. I’m in the process of selling a home that my ex-in-laws purchased.....I did all of the rehab and put all of my own money into the flip. We have agreed to sell and they just want X amount of money paid to them and the balance goes to me. I am not on the deed currently but could be added if needed. So my question is does it matter if I’m on the deed or not for tax purposes after the sale. We just plan to split the money at title.

Thanks in advanced!

[Aaron K.]

If I understand correctly you don't need to be on the deed to get paid as long as you have an agreement with the owners you should be okay.  That is the bigger concern here is that you are legally protected.  Your 'profit' will be taxed less the money you put in for rehab whereas their proceeds will be capital gains from the sale of the home.

[Thomas Jackson]

@Aaron K. Yes, we have an written agreement, so I’m not worried about that. It was actually just their concern that they would get hit with a capital gains tax for the whole amount, even though they are making zero profit, they are just getting back what they paid for it.

[Aaron K.]

Not an accountant but they would likely deduct it as the cost to pay you or if it is being paid to you through escrow they would never get it in the first place.

[Melody E Bergloff]

@Aaron K.; @Thomas Jackson

I generally agree with your analysis above. Since the ex-in-laws only loaned the funds for the flip and they are only recovering the loaned amount, they would not be subject to any capital gains tax. However, your ex-in-laws may be subject to a gift tax return or subject to ordinary income consequences if they charged you interest on the loan. Let me elaborate below. 

For example, your ex-in-laws gave you a loan for $50K for the flip and did not charge any interest on that loaned amount. Lets also say the typical interest rate on the loaned amount is 5%. If the accrued interest amount is over $15K for 2019, your ex-in-laws would technically be required to file a gift tax return for the "gifted" interest amount. However, if the ex-in-laws charged you interest on the loan, they would pick up that income as ordinary income. 

I hope that helps!

[Thomas Jackson]

@Melody E Bergloff thanks for the input. All they did was purchase the property. They paid cash for it and I did all the work and paid for all the materials. This was also over a 3 year period of time. Home was purchased in 2015. So sounds like they will not be subject to any capital gains and I get paid in escrow I will just pay my regular income tax on what I made minus my costs of materials. But it doesn’t benefit me one way or another to be on the deed. That was the main concern I guess......

[Melody E Bergloff]

@Thomas Jackson

You are correct. Just because your ex-in-laws are on the deed, this does not create a tax implication in itself. 

[Lisa Eckman]

Agreed.  Although not a tax expert by any means, the tax event is selling the property, and that will be handled through escrow.  Once escrow closes, a form will be generated that will indicate the proceeds they received from the sale, and the proceeds you received from the sale.  Each of you will report that on your taxes.