Leave equity share intact, or have partner buy me out?

Question

Hi all, apologies if this is the wrong forum for this question. The property is in San Jose and I'm trying to think about it like an investment.

My ex and I bought a condo in 2015 for $604k. Last October, it appraised for $640k when we refinanced, which is in line with the current comps. The ex and I split in February of this year, and she and our son are living in the condo and she's paying the mortgage. My question is about handling the equity.

She contributed $120k to the down payment, and I brought $50k. She has said she will buy out my 30% share, but I wondered if I should leave my share intact for 30% of the profit when she sells. If I do this, she wants me to pay 30% of the property tax as well. I'm new to real estate investing, but this feels like a 30% stake in a property. I know that an experienced investor could make better use of $50k, but I'm not experienced. Also, I'm not sure how much it costs to sell, but she said she might sell in the next year, and I saw an estimate of 6% to the Realtors? That would eat all of the current appreciated profits, I think.

Do I have her buy me out, and if so, how do we do that? Or do I maintain my stake and hope a Google campus ten minutes away in downtown is going to force more appreciation?

Thanks so much

Linda Weygant · Answer

This is a divorce/split scenario, not an investment scenario. Her buying you out of your equity portion is not a taxable event. You are simply dividing the assets of the relationship and walking away.You are WAY overthinking this. You aren't selling the property, so capital gains don't apply. And remember, she may never sell it. She may say she'll sell in the next year or two, but she is under no obligation to do so.

Jerry W. · Answer

@Shawn Franks, The money you use to buy a property is not profit when you sell it. Now if you took depreciation you might have a recapture event of the amount you depreciated. If you used it as a home not as an investment you would not have used depreciation. Talk to your tax accountant, he will need to know to do your taxes next year anyway. As to whether to sell or wait you will have to make that decision. Your expenses to sale the property would probably be between 6 to 8%. Now if she is paying the mortgage there would continue to be principal paydown as well as possible appreciation. I think you are better off selling your share and parking your money elsewhere. Mostly this is because of the potential for conflict. Either way be sure to be stand up in the deal. Your lives are tied together until your child is at least 18 years old, and really forever. Good luck either way.

Steve Vaughan · Answer

I vote for @Jerry W. on the legal/tax/relationship end for sure. These are never as simple as we'd like to think. Sometimes while we're sitting there counting what could/should be, our shirt is being lost!Account Closed would be a perfect person to consult as well. Business, relationship and market-specific advice to your area. Hopefully he has a moment to chime in! Good luck!

Account Closed · Answer

Hi Shawn,Sorry about the divorce. So the condo went up $36k in value. Selling commissions are about 5% and closing costs are about 1% of the sale price. That basically eat up all of your gains. Have her give you $50k and be done with it. You deed the property over to her. She will likely have to refinance and put the loan solely under her name and get your name off of the loan. There shouldn't be any tax event in your scenario.With respect to Google Village, it won't happen overnight. We're still about a decade out. It will definitely a game changer. Traffic will be brutal then so the closer you are to the Google Village, the more valuable your asset will be. Better luck next time Shawn.

Shawn F. · Answer

@Jerry W., I really appreciate you answering my questions and the advice you gave. Our child is young and we'll be in each other's lives for a very long time. I will definitely be stand up with her. I feel that remaining partners in this venture would be detrimental to our relationship going forward, so it only makes sense to separate myself from the situation. Thanks again.

Max T. · Answer

Take the money

Jim D. · Answer

if you've lived in the home as your primary residence for at least 2 of the last 5 years, your gain on the sale if the house will be tax exempt. Since it sounds like you didn't quite live in it two years, I'd probably check with an accountant to see if it matters since your ex is still there.

Jim D. · Answer

I'd take the money now as well. Dual ownership makes things complicated because you both have an interest and want a say in how to run it, when to sell, what repairs to do in preparation for the sale, what offer to take. Hard enough with a regular business partner; perhaps harder with an ex.I'd go for the clean break and let her buy you out at the recent valuation of $640k.

Shawn F. · Answer

@Max TanenbaumMy 30% stake in the increased equity would be about another $10k. I understand that I'll have to pay tax on any earnings, but I'm more concerned about not having to pay tax on the initial $50k that I already paid taxes on. I'm asking how to properly avoid a tax bill on my returned money, or if it would even be considered a taxable event.

Max T. · Answer

Why would you only want 50k if your share has grown? So what if you have to pay taxes.