Refinance from llc to personal, and sell, taxed much?

7 Replies

So I currently have flip that is almost done but past profit point, I wanted to refinance to my name, to sell or rent. My question is , would I get taxed just for difference of loan and sale price, or would the money I put at closing cost and holding cost be accountable and lower amount taxed , or be able to show loss? Not sure if this helps but, I loaned money to llc (two member) to pay closing cost, and pay directly from my bank to hml mo interest and holding cost. If any cpa in south jersey please pm me too, looking for cpa too.

@Darshan Patel Showing a loss is certainly possible. Closing costs and holding costs are both included when calculating your net taxable profit (or net loss) from a flip.

If you have any other questions, PM me and we can chat!

Loans are largely irrelevant for tax calculations.  The do come into play in that loan-related costs are part of your closing costs.   But the loan amount outstanding when you sell has no effect at all on how much tax you owe.  If you've highly leveraged a property its entirely possible that you would have to bring money to the sell closing in order to pay off the loan AND also owe taxes.  That is, you've already grabbed the profit by refinancing.

When you sell, the tax is based on your gain on the sale.  Your gain is the selling price, less selling costs, less your basis.  Your basis is what you paid for the property, plus buying costs, plus capital improvements, less depreciation.   Depreciation would only come into play if you actually do make it a rental.  If its purely a fix and flip then there is no depreciation.  With a fix and flip, all your fix up costs add to your basis.  With a rental, all the money you spend getting it rent-ready adds to your basis.  After its rent ready, things are more complex.  Some items (e.g., a new roof) add to your basis and then get depreciated.  Others (e.g., repairs and maintenance) get expenses in the year you spend the money and don't affect your basis.

@Darshan Patel

This is hard to get used to, but financing does not matter for taxes. Well, almost does not.

Let's say you spent $100k to buy a house, $20k to fix it, and $5k in holding costs - all cash. So, you have $125k "in." Today, you sell it for $160k. Your profit is $35k.

Now - the same deal, except you financed the purchase. Whatever you borrowed - be it $100k, $80k or $50k - will eventually have to be returned when you sell. So, it does not change any calculation.

The only extra expenses out of your pocket are costs of getting the loan (appraisal, origination fee, etc.) and interest. Those two will reduce your profit. Maybe it would end up being $25k instead of $35k.

Refinancing and renting would make my example more complicated, but they would not change the end result, which is: financing or refinancing itself does not matter, only costs of obtaining the loan(s) and interest become an extra deduction.

So, if you sell now, you may very well show a loss. But it would not be because of financing (except the interest and fees). It would be because your purchase price plus cost of rehab ended up higher than what you could sell the finished property for.

@Nicholas Aiola , @Jon Holdman   @Michael Plaks

Thank you, it gives better idea on how profit will be taxed. One last theoretical questions, if it was transferred to another LLC (single member, me), and later sold (say within 2 months), would profit or loss that is calculated, be similar or same? Reason for question is to find a way to protect my current asset/interest in llc, if it cant sell fast or smell trouble i'd like to make sure my investment safe. Thanks again for taking time to give your inputs, i really appreciate it.

LLCs are pass through entities and the taxes from those flow to your personal tax return (or returns, if multiple members.)  Moving it from one to another if both have the same members has no effect on taxes.

@Darshan Patel

@Jon Holdman hit the nail on the head. Income/losses from a single member LLC will flow through to your personal return, so a sale in the LLC or in your personal name will have the same effect, tax wise.

Makes sense, thank you again everyone.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here