Unsecured PLOC that is cash out refinanced into conventional

[Donnie M.]

I tried searching BP and google for a direct answer but could not find an answer about unsecured lines of credit. I plan on buying on 26k property using my Private Line of Credit (PLOC) from my bank and it will appraise for 50 - 60,000 after repairs. The PLOC works exactly like a HELOC except that it is unsecured and has a higher rate.  In 6 months I will cash out refinance it into a conventional loan for exactly what I owe on my PLOC.

I do not know if this is common to do with a PLOC. I know with a mortgage or HELOC I would not have to pay capital gains tax on the refinanced amount because it is a secured loan. So my question is, will I have to pay capital gain taxes at the end of the year on the refinanced amount since the funds I bought the home with were unsecured?   Which will be about 26k.  

[Steven Hamilton II]

Originally posted by @Donnie M.:

Originally posted by @Steven Hamilton II:

 You will end up paying taxes when you sell the property. You need to look at it and realize you pulled out your gains now. SO if you sold for that same amount even if at sale you may not take home those funds, you have already received them.

Thank you all for your responses.  The bolded part is throwing me off though so excuse my ignorance on the subject.

 So, what you are saying is that with this PLOC strategy that when I sell the home:

I will not receive any of the money from the sale even if I have principal paid off somewhat (say 16k left in principal) and I sell for 26k (same amount I refinanced into to pay off PLOC).  

I would only receive funds if I sold it past 26k, for example, I would only receive 14k if I sold it for 40k (even though principal is 16k and pay capital gains on the full 40k).  

Am I understanding it correctly?

If I am understanding correctly, this strategy seems ineffective in my opinion and I will totally go with 20% down conventional for such a cheap home.

 If you cash out more than what you're into the property for you are removing equity.

Example:

Buy 50k.

Refinance 80k

Sell 100k.

Closing costs. 8k.

Taxable Gain 42k.

Cash proceeds from closing: 12k.

Tax (based upon 15% capital gain rate and 5% state rate): 8.4k

You can see if you have removed 90k of equity it wouldn't have been as pretty. You would have to come out of pocket for closing costs. Keep in mind this is assuming no depreciation either.