Taxes on BRRRR Cash-Out Refi?
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
ARV: $115,000
Cash out refi (70/30): $80,500
Closing costs, etc: $5,000
Original Loan payback (+3% interest): $72,210
NET: $3,290
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?
Thanks!