Does anyone know if you have to pay taxes on the cash-out portion of a BRRRR property? I know that you pay taxes with capital gains on a flip. But wondering how taxes would work on a BRRRR property.
I'll give a scenario. Let's say I purchase a $50k distressed home + $20k rehab with a construction loan from a short-term lender, and plan to pay back the short-term loan with the cash-out refi afer rehabbing. There is a local Cincy credit union that will apparently do a 1-year rehab loan with 3% interest. But lets also say that the cash-out value is more than the original loan...
Original Purchase Price $50,000
Rehab Budget: $20,000
Total Financed Amount: $70,000
Cash out refi (70/30): $80,500
Closing costs, etc: $5,000
Original Loan payback (+3% interest): $72,210
So in this case, I know that the majority of my capital gain is now equity in the property, and I wouldn't pay taxes on it until I sell the property (and could still avoid with a 1031). But do I have to pay taxes on the $3,290 or any portion of the investment for that matter?
there is no capital gains tax as you have not realized a gain, while you still have ownership. That house could be put up for sale next year and only bring in $60,000. No taxes until a sale
@Kyle Hipp thanks for the info! That is what I was thinking, but just wanted to make sure since you can actually profit with the cash-out refinance if the numbers work out.
I see you are from Appleton. I traveled there a lot on business last year. Really cool town...
Kyle is correct. The refi doesn't trigger any tax.
A consideration you didn't ask is; "Can I deduct the interest on the new mortgage?"
The answer is yes, no, it depends.
The interest on the portion of the refi used to repay loans used to acquire or rehab the property would be corrected deducted on schedule E for the property. Also funds used to further improve or repair the property.
The portion used for other investment can be deducted elsewhere in your returns.
The portion used for non-investment isn't deductible.
Keep in mind there are IRS tracing rules.
If you already knew all this forgive my off-topic comments.
If this is all new, you're welcome and ask more questions...;)
Thanks @Account Closed
A lot of variables involved. All the more reason for CPA support....
Create Lasting Wealth Through Real Estate
Join the millions of people achieving financial freedom through the power of real estate investing