How Does the Capital Gains Tax Exclusion Apply to Three Co-Owners of a Home?

As you might know, people who sell their home and meet certain conditions can avoid paying capital gains tax on a set amount of the profit, normally $250,000, but doubled to $500,000 for married couples filing jointly. Where does that leave someone who, say, bought a house with two other friends?

Let's say, for example, that in order to buy a home, you found two people you felt you could live with, you split the purchase price evenly between you, and amicably shared the place for years, until your lives went in different directions and you all agreed to sell. And let's also imagine that you bought the place for $300,000 and expect to sell it for about $650,000.

This article will explain the tax implications: that is, whether all three of you can make use of the capital gains tax exclusion to avoid paying tax on the profits.

Each Co-Owner Can Deduct Up to $250,000 for Capital Gains Tax Purposes

If three of you co-owned and used a house as your principal residence for at least two of the five years prior to the date of sale, you'll each will be entitled to benefit from the special home-sale tax exclusion. (See The $250,000/$500,000 Home Sale Tax Exclusion.)

This exclusion is most often described or used by either single owners or married couples, but you don't have to be married, or a couple, to qualify for it. Unmarried co-owners can also use the exclusion.

As long as each unmarried co-owner satisfies the two-out-of-five-year ownership and use tests, each gets to exclude up to $250,000 of their share of the gain from the sale. (Married couples who file jointly can exclude up to $500,000 of their gain). Thus, three of you together could exclude from tax up to $750,000 in gain.

For example, if your home is in fact sold for a $350,000 gain, one third of the gain—or $116,666—will be allocated to each of the three owners. Each owner can exclude up to $250,000 of gain on their individual income tax return, so no tax would be due on any of the gain.

For More Information

See more articles about Tax Issues in Home Sales.