Capital Gains orn Refinanced Properties??

6 Replies

simple tax question here...if i buy a property and a rehab it, and i'm all in for 200k, refi it and pull out 100k more, and then firesale at 300k, do i owe capital gains or is it a breakeven? something i'm missing here? id prefer if this discussion doesn't get into banks, appraisals, etc. so, for the sake of this thread, let's assume i have a private lender and getting the equity out is no problem....thoughts? thanks

I think I understand your question...

The refi should have no impact on your tax burden (ignoring write-offs for loan costs and mortgage interest). So, if your all-in costs were $200K (your basis) and you sold for $300K, your gain would be $100K, and that's what you'd owe tax on.

Btw, as this example proves, a cash-out refi is a great way to liquidate equity without incurring a tax burden (at least not until you sell).

hey j, thanks for the response..you're correct, refinancing is a great way to tap into equity tax free...i was wondering if when you sell, do you owe taxes on the money you pulled out...it seems the refi has no effect on the basis and you still do owe taxes on that...thanks for the answer!

Financing has no direct effect on taxes. It has an indirect effect in that interest and some other expenses are deductible.

Use caution in tapping "into equity tax free". You are correct that you do not pay taxes on the loan proceeds. However, if you sell the property you will owe taxes. If you've taken out a big chunk of cash (good luck finding that lender, BTW), you net proceeds on the sale, after paying taxes and paying off the loans, may be negative.

des, glad you benefitted from this question...i hesitated to ask bc i thought it was a dumb question that i should know the answer to by now....

jon, thanks, as always, for the solid advice