JVs and Capital Gains: Getting down to the nitty gritty

Posted on: September 11th, 2013 by Real Estate Accountants 3 Comments

Note: A version of this article was originally published on georgeEdube.com.

Question: I am currently working on my first JV partnership and have a question regarding Capital Gains.

In this instance my JV partner is making the down payment and will solely be on the title and mortgage. In your experience, what is typically done regarding Capital Gains? In the event we sell, my JV partner would be required to pay Capital Gains as they are the only person on title. Is this something we need to take into consideration when drafting the agreement? Upon the sale of the property, is Capital Gains one of the items subtracted from the sale price (along with initial deposit, appraisal, legal costs, selling realtor fees and remaining mortgage) to determine remaining profit?

Answer: First, while I hate to harp on this, never never never describe your relationship as a “JV partner” as this has significant legal and tax consequences which are unlikely to be what you are looking for. More likely, but not always, you are referring to a coventurer.

It sounds to me as if you need to set up a time to talk with an advisor over a variety of the tax issues, but to partially answer your question, there’s a difference between legal ownership and beneficial ownership. In other words, your agreement can dictate who is going to be taxed on income and the ultimate disposition of the property, regardless of whose name is on title. This is frequently done on a 50/50 basis with many REIN members.

In other words, while one person may be on title, the beneficial ownership is split so that each investor will equally split the gains on ultimate sale. Provided that the JV agreement specifies the relationship, from a tax perspective, all is well. Consult with your lawyer to ensure that mortgage fraud is not being committed or adjust the agreements as necessary to stay onside of the rules.

When we determine the final tax implications of a sale, the capital gain is not subtracted but is, in fact, the end result of the calculation after we adjust for various fees, such as realtor and closing costs.

George E. Dube, CPA, CA


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3 Responses

  1. Robert says:

    Hey George, I guess Don and Russel should have consulted with you more before writing “Real Estate Joint Ventures” because they use the term “Joint Venture Partner” all over the place in that book. I could be wrong, but I don’t recall them mentioning any cautionary notes about labeling various investor arrangements.

    • Jeremy says:

      I too am a huge fan of both Don and Russel’s strategies and coaching, but they pull people like George in to their circle due to specific expertise. I am going to follow their advice when given….

  2. Dube & Cuttini says:

    Thanks Robert. Yes, Don and Russell and I have had that discussion before. 🙂