Among the more creative arguments in partition action cases is the idea that one co-owner should pay the capital gains taxes of the other co-owner.
When co-owned property is sold, especially in a partition action, disputes often arise over who gets what, known as a partition accounting. Usually, these claims about accounting relate to unequal payments, known as offsets. However, some co-owners go a step further and make surprising claims that their co-owner should be liable for detriments suffered by the tax code, such as capital gains resulting from a sale.
While this idea may feel intuitive to some, it has no basis in California law.
Partition Accounting Focuses on Fair Division of Proceeds
In a California partition action, the court’s role is to divide the net proceeds of the sale according to each party’s ownership interests and any allowable adjustments. Code of Civil Procedure Section 872.140 states that the court may “order allowance, accounting, contribution, or other compensatory adjustment among the parties in accordance with the principles of equity.”
Under California law, this may include:
- Reimbursement for mortgage payments
- Contributions to property taxes
- Costs of improvements or repairs
- Offsets for exclusive use or rental value (in some cases)
Courts may also account for equitable adjustments between co-owners related to the property itself. (See Code Civ. Proc., § 872.140)
Scope of a Partition Action Limits Offset Claims to Those Related to the Property
While an accounting in a partition action may feel like it had no boundaries, the law has stated otherwise.
Rather, the scope of a partition action was explained by Demetris v. Demetris (1954) 125 Cal. App. 2d 440, 444, which found that: “In a suit for partition it is a general rule that all equities and conflicting claims existing between the parties and arising out of their relation to the property to be partitioned may be adjusted.”
Capital Gains Taxes Are Not Related to the Property, But Rather are Personal to the Co-Owner
However, courts do not adjust distributions based on a party’s personal tax consequences. Capital gains taxes are imposed by federal and state tax authorities on the individual who realizes the gain, not on the property itself and not on the co-ownership relationship.
Indeed, the amount of the gain relates to the contributions and basis of each co-owner such that they can differ between co-owners. For instance, one co-owner might have inherited their fractional interest, thereby obtaining a step up in capital gains basis, while the other did not obtain that benefit.
Moreover, the tax imposed on that gain depends upon the income of the co-owner, not based upon the property. Indeed, there are thresholds where some co-owners may pay no capital gains.
Even further, the tax is owed to a third party. It is not an incidence of the co-ownership, and would be owed only when a co-owner sells their interest.
Partition is about dividing the property (or proceeds), not equalizing the after-tax outcome for each party.
This means that each co-owner is responsible for their own tax liability based on their individual financial situation, including:
- Their basis in the property
- Length of ownership
- Applicable exclusions (such as the primary residence exclusion under Internal Revenue Code § 121)
- Their personal income and tax bracket
Two co-owners can walk away from the same sale with very different tax consequences. One may owe significant taxes, while the other owes none at all. That difference does not create a legal obligation for one co-owner to subsidize the other.
Why Co-Owners Try to Shift Capital Gains Taxes
Despite the lack of legal support, this argument tends to surface in emotionally charged disputes.
A co-owner facing a large tax bill may feel that:
- The sale is being “forced” on them
- They are being unfairly burdened compared to the other owner
- The other co-owner should “make them whole”
While these concerns may be understandable from a personal perspective, they do not translate into enforceable legal claims.
Courts consistently separate personal financial consequences from the equitable division of property interests.
Generally, co-owners will only make these arguments when attempting to reach a settlement before a partition action is filed. After the court is involved, they will see that their co-owners have another option to reach a fair resolution of the case: by asking the judge.
If your co-owner is making unreasonable claims about taxes or trying to reduce your share of the proceeds, Talkov Law Partition Attorneys can help you navigate the process and protect your rights. Call (877) PARTITION (727-8484) or reach out online to speak with a partition attorney today.
