A JV contribution is equity, and as such it reduces not only your future profit, but also reduces your invested capital ie your equity also referred to as your adjusted cost base (ACB). It may even be taxable to you if it exceeds your ACB.
Example: You bought a house for $300,000 a few years back with $60,000 down plus a $240,000 mortgage, and you depreciated it for a few years, so now your ACB ie your remaining equity is $50,000. The house today is worth $450,000 and the mortgage down to $200,000. Your paper equity is now $250,000. You sell 50% of future upside for 20% of value ie $90,000. You now have a taxable gain of $40,000, ie the difference between your ACB of $50,000 and what JV partner paid you. You have to declare the $50,000 as a gain that year in your annual tax filing.
The JV partner will have to pay taxes on their eventual gain. So if their $90,000 is eventually $150,000 they would declare a capital gain of $60,000. You report your gain on your share.
Annual ACB loss allocations may apply going forward 50/50 to both of you. Talk to an accountant about that.
Thomas Beyer
Asset Manager, Investor, Author, Father, Mentor
www.prestprop.com
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