Two on title down to one? Any Capital gains?

Question

If two people are on title of a free and clear house.  After rehab and refinancing and closing the house is titled into one of the two people at the refinancing. There’s no capital gain shown due to it being a cash out refi right?  The removed person have to pay any since they are no longer on title? Anyone done this? I have heard about it just haven’t done it.  Any issues?

Debbie J. Skora · Answer

@Dave Toelkes I did not get the impression it was entirely hypothetical.  I got the impression he is considering doing this and that's why now is a good time to get good legal advice.  So many people get into multi-member LLC ownership of property (which this would be, unless his partner is his spouse with whom he files joint tax returns), then want to exchange out as if they owned it themselves. You want to set up your ownership structure properly from the beginning, based upon your ultimate plans for disposition of the property, and there are many legal and tax consequences to consider.

Debbie J. Skora · Answer

@David Roe important question:  you mentioned you owned the property together in an LLC.  How was his name “removed from title” upon closing the refi?  Was the property titled in the LLC, and now it is in your name only?  If the LLC owned the property and transferred it to you while giving the partner cash, that is not a capital gain because your partner did not sell a capital asset.  He basically received a distribution from the LLC, which is taxed differently than a capital gain (and Not 1031 exchangeable either).  This is an excellent time to talk to a tax attorney.

Dave Toelkes · Answer

The circumstances suggest that you bought out your partner's interest.  Whatever your partner received in excess of his capital contribution will be a taxable gain for your partner.  As the remaining owner, your portion of the cash out refi is tax free.   Your tax basis will be your initial capital contribution plus the amount you paid to buy out your partner.

Dave Toelkes · Answer

@David Roe

Not sure I would characterize "no capital gain" as a benefit.  The wholesaler will have to pay ordinary income AND self-employment income taxes on his profit from the deal.  The total tax bite will be greater than capital gains taxes.

For your share of the participation, you are contribuing materials and sweat equity.  Chances are that neither are  deductible as a business expense for a property you own/co-own.  Consult with your own tax advisor on how your rehab work will be treated for tax purposes.  If it is an adjustment to basis, then you need to take all that cost as part of your cost basis in the deal.  This will certainly affect how much your partner should receive for the buy out.

David Roe · Answer

Well least now I know.  it was at least worth the question and opportunity to learn something

David Roe · Answer

I have an LLC but could easily make an LLC for doing this, and yes my lawyer does the LLCs for me i don't/wouldn't build them myself.

David Roe · Answer

It is hypothetical, But also would consider it.  I make great money full time with my W2 Job, also have a lot going out for expenses.  I am always looking for ways to leverage deals and haven't seen anyone do this yet.  I don't care about making profit on a BRRRR only the long term hold, so a whole-saler is looking for that quick profit.  If i partnered with a / or more than one whole saler that would find the deals, purchase them, I rehab them and refinance them into only my own name and they take the full cash out (purchase,rehab,profit) and i just get the property and equity tied up, I would be 100% happy with that.  The benefit the other person gets is a larger return on the investment and no capital gains.

Dave Toelkes · Answer

This is a hypotheticql scenario. The OP stated that title could be held either in LLC or jointly titled to each named owner.

David Roe · Answer

@Lance Lvovsky

No, so if a partner with purchase capital buys a house and we title in LLC or title in both our names. (30k)

I pay and manage rehab work. (15k)

I apply for refinancing in my name only with cash out at closing.

House apprised (100k)

75% LTV (75k) cash out at closing

Total profits on cash out is (30k)

But the house was never sold only his name removed off title at closing on the refinancing.

Lance Lvovsky · Answer

@David Roe

Was it a gift?

Two on title down to one? Any Capital gains?

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