Cashout Refi to avoid cap gains when selling?

5 Replies

Hey there, just a theoretical question: Borrowing money via a loan or cash out refi isn't taxed as income since it's borrowed. If you were to sell a rental house without a 1031 exchange, I *believe* the portion that you have to pay capital gains tax on is the sale price minus the amount owed, right? So if somebody owned a 1 Million dollar rental property and sold it outright, they'd pay cap gains on $1M. If, on the other hand, they did a cash out refi to take it to 80% LTV, aka borrowed 800k against it, then sold it, wouldn't they only owe cap gains on the 200k remainder? I'm assuming one of my assumptions is incorrect. Can somebody clear this up for me?

No.  Your loan amount has bearing on cap gains tax due.....it’s is calculated on your costs of the property verses your sales price, less actual selling/closing costs.....doesn’t matter if you borrowed 100% or paid all cash.

Originally posted by @James R. Copeland :
Hey there, just a theoretical question:

Borrowing money via a loan or cash out refi isn't taxed as income since it's borrowed. If you were to sell a rental house without a 1031 exchange, I *believe* the portion that you have to pay capital gains tax on is the sale price minus the amount owed, right? So if somebody owned a 1 Million dollar rental property and sold it outright, they'd pay cap gains on $1M.

If, on the other hand, they did a cash out refi to take it to 80% LTV, aka borrowed 800k against it, then sold it, wouldn't they only owe cap gains on the 200k remainder?

I'm assuming one of my assumptions is incorrect. Can somebody clear this up for me?

 Loan on the property has nothing to do when calculating gain. Your basis determines gain. Loans comes into play in determining if you get to keep the proceeds from the sales.

Let’s say you sell the property. Simplified to clear the concept. 

Sell price 1M ( this is your proceeds) 

Basis 500k

Gain: 500k. 

So, let’s see if you had loan vs no loan. 

1) no loans: 

You get to keep entire 1M 

2) 400k  loan 

You get to keep 600k 

3)  800k loan

You get to keep 200k. 

All the three cases have same gain, 500k. 

Hope that helps.