Property Buy-then-Sell question.

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.

Reply to
R-Jay
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"R-Jay" wrote

Technically they are a partnership, and should have done things right and formed it under state law.

This is an acceptable and often practiced alternative.

Most likely the closing attorney will report the proceeds under one SSN (the first name on the deed) unless they inform the closing attorney to bust up the sale in some other manner. How the property was titled may play an important factor in that.

But it gets reported on Schedule D as a short-term capital gain.

Reply to
Paul A Thomas

I agree with what Paul said on all points. However, I think that an emphasis needs to be made on how the title company will report it to the IRS. If there is just one SS # on the 1098, then that individual will be in for a surprise when the IRS matches his return up with what the title company reported. If that is the case, they should contact the title company and see if the company could re-issue the 1098 showing all SS #'s.

Russell Tuncap, CMA, CPA

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Reply to
R

Thank you. That's exactly the information I was seeking! I'll pass it on.

Reply to
R-Jay

Thanks. That makes sense. The property was titled in all 3 names. I'll get them to contact the title company to see if the 1098 was issued in all 3 names with 3 SS#'s. If not, I'll tell them to ask that the 1098 be re-issued in all 3 names so the one person whose SS# was used doesn't get stuck when he files his tax returns.

Reply to
R-Jay

P.S. After some checking, I found that the actual form number is 1099-S. Also, after contacting the title company, my friends learned that they just need to provide their social security numbers, along with a statement that the allocation of the proceeds should be 1/3 each. The title company will then issue three 1099-S forms -- one for each owner using that owner's name and SS#, and showing that the amount of proceeds for that owner equals 1/3 of what the total proceeds were. Then each will do his own tax return.

Thanks again for the help with this.

Reply to
R-Jay

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