Dispositions of Jointly Owned Real Property
If jointly owned real estate is sold, gain or loss from the sale is generally divided among the co-owners in proportion to their share of the property -- that is to say the individual investment each owner had in the asset is taken into consideration.
There is an exception to this rule if joint ownership is created during sale negotiations for tax saving purposes. In that case, gain is not divided but is fully taxed to the original owner of the property (Lannan, Robert v. Kelm, (1955, CA8) 47 AFTR 741).
Different Uses By Co-Owners
The way in which one co-owner uses a co-owned property is not necessarily attributed to the other. Where a nonactive co-owner’s interest is as an investor, profit from the sale of a property is capital gain to that person even though the other owner holds the property for sale to customers. Two factors should be looked at in determining whether property is held for sale:
-
Whether the contemplated purchasers are “customers” of the taxpayer;
-
Whether the business activity of others should be imputed to the taxpayer so as to be considered “taxpayer’s business”.
Case in point: A doctor invested with one of his patients in the purchase of unimproved property. He was allowed capital gain treatment on land subdivided and sold in lots over a six-year period where the subdivision was carried out because the doctor’s co-owner needed money and the land couldn’t be sold as acreage. The co-owner did all the work of the subdivision and received a 10% commission on the sale. (Van Drunen, Jacob, TC Memo 1964-15)