What if you sell a Brrrr

Question

Hi BP!

I've been studying alot about the Brrrr strategy.  There is a house here that I definitely want to move on, but I'm curious about the after part.

What I haven't been able to discover is how taxes will factor in.

Obviously, you don't pay taxes on the refinance part, since that is technically loan money. But what about if you were to sell 6 months later? You'd have very little equity, and therefore very little profit from the actual sale.

Here is where I'm unsure: wold you pay taxes on the little bit of equity that you gained between the refinance and the sale, or would you pay it on the difference between the original purchase price and the final sale.

Thank you!

Brandon Hall · Answer

@Robert Freeborn equity does not equate to gain. Many people mistake this as they think the cash they receive should be the gain, however this is rarely the case with real estate.

Capital Gain/Loss = Selling Price - [Purchase Price + Improvement Costs - Depreciation]

Natalie Kolodij · Answer

@Robert Freeborn Like Brandon said the refinance/motgage amounts have nothing to do with your gain.

Gain= Selling price- Basis-selling costs

In this situation Your basis is $130 (purchase price and renovation capitalization)

You sell it for $220k

Lets say selling costs are $10,000

So Gain= $220,000-10,000-130,000= $80k of gain.

Literally ignore the mortgage/refi amounts on the property. This will be how you calculate how much cash you'll get- but that's not equal to your gain.

In this case you'd receive $220k- your mortgae of $200k= $20k cash (less the closing costs to sell)

Robert Freeborn · Answer

@Bill Hampton But how much of the sale is taxable?

Lets say you buy for 100k. You renovate it for 30, so you're in it to 130k. Your ARV is 220k. After you repair it you refi it for 200k, and later sell it for 220k. Are you liable for taxes on the 20k, or on the 90k?

If your mortgage balance is, say, 200,000, and your home sells for 220,000

Bill Hampton · Answer

@Robert Freeborn, you should hold the property at least one year to lower your tax burden.  Holding it for at least one year qualifies as a long-term capital gain. Long-term capital gains taxes are lower than short-term capital gains taxes (i.e. six months).

What if you sell a Brrrr

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