Cash out refi buy out - tax repercussions

Buying & Selling Real Estate
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Cash out refi buy out - tax repercussions

Daniel Mills
Investor · Kusatsu, Shiga · Member since 2015 · 147 posts · 87 votes

Hi guys,

I know this is a question best asked of my CPA, and I am in the process of contacting him but considering he might not get back to me quickly, I was hoping I could get your ideas here.

I own a property in Idaho with my mom - she is on the loan with me. We bought it in 2015 and it has gone up in value quite a bit. We are in the process of doing a cash-out refinance right now and what I would like to do is give her the money we get from that to basically buy her out and take her off the loan and title. We want to do this to get access to more conventional loans and for asset protection reasons in the future (I don't want to make two separate LLCs for the two properties I own in the state.) 

My question is if this will trigger a tax event. Will my mother have to pay cap gains on the property like she has sold it?

Any ideas?

Thanks,

Daniel

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  • Brian Schmelzlen
    Accountant · La Mesa, CA · Member since 2017 · 477 posts · 476 votes
    8y

    Hi Daniel,

    First, it is concerning that you are using a CPA that does not respond to you in a timely manner.

    It would be a taxable event because what you described is essentially a sale of your mother's ownership interests.  It should be taxed as a long-term capital gain.  Her gain would be the difference between the proceeds (what you pay her) and her basis (what she paid for her ownership interest, plus her share of any significant improvements, less her share of depreciation).

    Depending on your mother's taxable income, her capital gains rate might be 0%.  It depends upon her income tax bracket.

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    8y

    It would be considered a sale for your mother.

    How many conventional mortgages does your mother have?
    she is allowed to have up-to 10 conventional mortgages(1-4 are easy to obtain, 5-10 are slightly harder).

    buying her out would require you to pay fees to a title company, possible to the county to record the transaction and her accountant for a more complex tax profile for the year.

    I am also not sure I follow on the asset protection thing. A single member or multi member LLC should provide equal protection.

    Have you looked into your mother gifting her portion of the real estate to you? The downside is that she might not be able to use the cash-out refi as cash available to buy a future home.

    [email protected]917-280-8544
    Basit Siddiqi CPA4.979 Reviews
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