Cash Out refi - then sell?

Question

I'm sure there are many threads about this so if someone could point me to one of them that would be great.

If i have property i can't avoid paying capital gains tax on, is it a loophole to just do a cash out refi and then a few months later sell the property?

For example, let's say i have a home worth $400,000 and owe $200,000 on the loan. Let's say the bank will give me $125,000 on a cashout refi. A few months later i decide to sell the house and then rather than paying capital gains on a $200k profit, i only pay it on $75k.

Thoughts?

Ben Schembri · Answer

Cash out refi has no impact on your tax liability upon sale.

Kyle J. · Answer

There’d be no point in doing the cash out refi as it wouldn’t change your capital gain. For that matter, neither does the balance of the underlying primary loan.

In general, you’re assessed capital gains taxes on the difference between what you pay for an asset (your basis) and what you sell it for. Obviously there’s a lot more to it than that, and possible exemptions (and/or ways to defer it if you’re not exempt). Depends on a lot of factors though.

Ultimately it’s best to consult a tax professional about your specific situation.

Matthew Irish-Jones · Answer

@Jeremy Clarke only way to avoid Capital gains are a 1031 exchange or putting the gains into an opportunity zone.

Account Closed · Answer

@Jeremy Clarke

I second what everyone has said. Also, if you do a cash out refi, be careful as some lenders have clauses that penalize you if the property is sold within "x" years.

Account Closed · Answer

What you are suggesting doesn't work. Uncle Sam knows about that one. ;-)

What WILL work, and is perfectly legal is to do a cash out refi as you suggest then you can sell the property on a Lease Option and get an Option payment, usually 10% of value in addition. Borrowed money isn't taxed. For the Lease part, if you can rent it for at least as much as the PITI you are covering the mortgage. If you can Lease it for more than the PITI you keep the difference as "cash flow".

A Lease Option does not change title, which means you still own it. The buyer has the Option to buy sometime in the future. It isn't a taxable event for you until "if and when" he exercises the Option. It is a "higher level" investing technique. You still enjoy the tax benefits and principal pay down and you get the benefit of the cash out and the benefit of the cash flow.

Derek Hamilton · Answer

@Jeremy Clarke to my knowledge this wouldn’t stop the capital gains taxes. The way to stop them is the reinvest the money into another property

Michael Smith · Answer

Wanted to add to this one but it's all covered.  Good luck!

Gordon Cuffe · Answer

@Jeremy ClarkeThe capital gains tax amount is based on how much your property has appreciated since the time of purchase not on how much you owe.  If you purchased a house for 200k and now it is worth 400k then your gain is 200k and that is how much you get taxed on. It doesnt matter if you owe 50k on the house or 380k. You get taxed on the gain. If you dont want to pay on capital gains when selling an investment property then do a 1031 exchange.

Cash Out refi - then sell?

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