When real estate investors come to me to talk about joint ventures, inevitably the issue of capital gains enters the conversation. How do joint ventures and capital gains work? A common scenario or conversation goes something like this:
“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?“
First rule of joint ventures and capital gains: Avoid “partner”
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 co-venturer.
Legal ownership vs beneficial ownership
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, although the split can be tailored to the situation.
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 (or based on whatever percentage their agreements indicate). 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.
Resources
For additional resources, see:
- Buying real estate in a corporation: A guide for Canadian investors
- Due diligence – Work with the right people – Part 3
More questions on joint ventures and capital gains?
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
