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I purchased my home in 2006, paying all cash. I owned 100% at this time. My sister wanted to buy into my home and we agreed that she would pay the remodel cost of the portion she wanted to alter so as to have separate but relatively equal spaces within the home. She paid cash for the remodel. She has agreed to pay me an additional sum and in return she will be deeded a percentage of the property.
I need to determine what percentage we each own based on these facts. For purposes of simplicity, my basis in the property is $600,000 and she has contributed $30,000 towards the remodel which results in the total basis of the property now equally $630,000 and is going to pay me $200,000 more. How do we calculate what percentage of the basis we each now own? (i.e. $600,000 basis, her contribution is $230,000 and my contribution is $400,000). As we do not want to create a taxable sale/transfer of the part of my interest and will hold title just as joint tenants but not equal tenants and with no survivorship rights, how do we calculate the percentage of ownership? What is the best way to convey her share? We have a contract extensively setting out terms under which property can be sold, mortgaged or otherwise encumbered and the division of expenses and will hire an attorney to file all necessary paperwork. (We have also contractually agreed to the division of spaces within the home and other rights/responsibilities to insure that the cohabitation is fair to both parties and respects each person's private spaces, much like a roommate contract). A friend suggested I use weighted average calculations, but I cannot find an example which fits our particular factual situation. Help would be deeply appreciated.

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    Sounds like a tale of woe in the making. – Pete B. Mar 27 '18 at 19:16
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    @PeteB. I think we focus so frequently on the times that monetary ventures with family that go wrong because we never hear about it when they go right. I have had many good experiences loaning money that I knew might turn into a gift. I've had better experiences with family than with friends and acquaintances because I have been in a better position to judge the risk because I spent my whole life around them. (Some siblings I wouldn't ever consider loaning money.) I've never been stiffed by family, and I've never felt bad about saying no to them either. – NL - Apologize to Monica Mar 27 '18 at 19:37
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    Is $600k how much you spent, or how much the house was worth at time of remodel? – Hart CO Mar 27 '18 at 19:39
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The biggest problem is figuring out the current value, and the next is to determine the value added by the $30,000 remodel. (It's probably much less than $30,000.) You may wish to enlist the help of an appraiser in that effort.

If we assumed that your house is still worth $600,000 and discount her $30,000 contribution by 50% (this is probably a very generous estimate) that would give her an ownership stake at $215k and maintain a $400k stake for yourself on a new valuation of $615,000. That would give you a 65/35 split in ownership with her.

If instead we assumed that the value has since increased to $750,000 and give her a more likely valuation of $10,000 on her $30k remodel (bringing the new valuation to $760k) that would give you a $550k stake and give her a $210k stake. This would give you a 72/28 split in ownership.

Why would she get less than her $230k contribution? She is remodeling a house with her own tastes and preferences in mind. She will get to live in that updated house, but there is no guarantee that the next buyer would place any higher value on the same square footage just because it looks the way she likes it. Many homeowners buy a house, remodel, and end up adding less value than they spend. Presumably they enjoy the customized home enough that they don't mind the fact that they can't get their money back in an immediate resale.

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As we do not want to create a taxable sale/transfer of the part of my interest

She is paying you $200,000, and getting a third of a house in return. Depending on your jurisdiction, that may be taxable regardless of whether or not you actually make a profit.

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