In December 2004, three friends of mine bought a property together as an investment. It's a single family home that none of them lived in, and it was not rented out. All 3 names were on the deed. They paid cash for the property, so there was no mortgage involved. Now, six months later, they just sold the property at a profit.
My question is how should they report this when they file their 2005 tax returns? This is the only transaction they did together, and their plan is to just divide up the gain they each made and go their separate ways.
Do they need to file a partnership return? They never formed any formal partnership, and none of this was done in writing. They just did the whole transaction informally (not smart, I know).
As an alternative to filing a partnership return, can they each file their own tax return and just report that they bought a 1/3 interest in a property for X dollars, then sold their 1/3 interest for Y dollars, and each pay tax on their individual gain?
I assume that the title company will report the sale to the IRS using some form and their 3 social security numbers since there was no formal partnership or other entity with a separate federal ID number.
I do know that any gain that each of them made is treated as ordinary income since the property was bought and sold in less than a year.