Refinance tax implications

9 Replies

I am looking to do a cash out refinance on a property that has a lot of equity into it. Probably gonna pull out $75K.  What are the tax implications on a cash out? Is this taxed like a regular income, capital gains, etc?

No, you will have to prorate the interest based upon the investment portion. You will have to review the interest tracing rules with the IRS.

You only recognize it when you sell. So definitely consider the fact you are receiving the proceeds now as opposed to later. 

You are not taxed when completing a cash-out refinance.

On the other hand, as @Steven Hamilton II mentioned, you do need to look at the interest tracing rules to determine the deductibility of interest expense.

@Yoni Haiminis   In your example, you wouldn't be taxed on the $75k you pull out.  The proceeds from a cash out refi aren't taxed because it's treated as a loan (money you have to pay back) as opposed to income.

@Lance Lvovsky and @Steven Hamilton II

Colleagues, how much success have you had explaining the interest tracing rules to your clients and essentially "stealing" from them part of 1098 deduction? Do you feel it is worth fighting clients on behalf of the IRS over this particular rule? 

Originally posted by @Michael Plaks :

@Lance Lvovsky and @Steven Hamilton II

Colleagues, how much success have you had explaining the interest tracing rules to your clients and essentially "stealing" from them part of 1098 deduction? Do you feel it is worth fighting clients on behalf of the IRS over this particular rule? 

 You need to prepare a true and accurate tax return. 

@Steven Hamilton II - thanks for clarifying this for me. :)  OPR duly notated the files - yours and mine.

Now, that aside, are you willing to talk about the issue - privately if you prefer? When dealing with interest tracing, I feel like that guy who knocks on the windows of cars admonishing drivers for not using turn signals. And everybody is like - dude, nobody uses them, you're just impeding traffic, get lost. 

I enjoy a good academic discussion on the nuances of the Internal Revenue Code.  However...

One thing I learned early on in my membership here at BP (under the loving [key]strokes of @Steven Hamilton II ) is that these forums are a great place for delivering tax tips to real estate investors, but they are a  really bad place for academic discussions on the nuances of the Internal Revenue Code. 

I've never posted here about how complying with the IRC makes me feel, but I'm going  to venture a guess it is also going to seem awkward and misplaced.

Best of Luck!

Originally posted by @Michael Plaks :

@Steven Hamilton II - thanks for clarifying this for me. :)  OPR duly notated the files - yours and mine.

Now, that aside, are you willing to talk about the issue - privately if you prefer? When dealing with interest tracing, I feel like that guy who knocks on the windows of cars admonishing drivers for not using turn signals. And everybody is like - dude, nobody uses them, you're just impeding traffic, get lost. 

You would be client a disservice if you didn't apply it and do as you are supposed to. We are expected to prepare a true and accurate tax return. Do you know what preparer penalties are? Believe me when I say the IRS is looking for them in every exam. They are a source of revenue generation. 

This is not a rocket science issue. It is a matter of following the code. Things like this are what you do to protect your clients and why they work with you instead of trying to DIY.  

Don't get me wrong I love fixing mistakes of other people; however, my biggest issue is when a "professional" doesn't do what they are supposed to be doing and should know better. 

Originally posted by @Paul Allen :

I enjoy a good academic discussion on the nuances of the Internal Revenue Code.  However...

One thing I learned early on in my membership here at BP (under the loving [key]strokes of @Steven Hamilton II) is that these forums are a great place for delivering tax tips to real estate investors, but they are a  really bad place for academic discussions on the nuances of the Internal Revenue Code. 

I've never posted here about how complying with the IRC makes me feel, but I'm going  to venture a guess it is also going to seem awkward and misplaced.

Best of Luck!

Paul,

I thoroughly enjoy it as well; however, it takes a complex understand of more than just one component or area to understand how they all interact together. There are always multiple variables. This is not a place for a highly technical discuss as most wouldn't understand it here on BP. There is a reason I teach highly technical CE courses. 

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