Home equity loans to avoid capital gains upon sale

[Ashton Karp]

I am not in a position to act on this question but am genuinely curious about its possibility.

When it comes to capital gains tax, this is paid when selling an asset for a profit after any adjustments that can and are able to be made, but only upon realizing the profits. If I understand, this means that any loans that encumber the asset are deducted from the net profit, therefore lowering the taxable basis.

What limitations are there for encumbering a property that has high equity, prior to a sale, in order to lower the tax basis as much as possible? Are there typically clauses in mortgage liens that would prevent someone from taking a second mortgage and subsequently selling the property?

Excuse me being naive in asking this question.

[Tom Degroodt]

One thing that I think people confuse is if an investor says something like " I bought the house for 100K and it is now worth 200K.  Since I have 100K in equity I think I will refi, rather than pay Capitol Gains tax on it, if I sold it."

What the investor really means is he wants to raise capitol.  To do that he can pull the equity out with a loan, or pull it out selling the property.  If he sells he needs to pay Capitol Gain tax right now.  If he refi's the asset it doesn't change the fact that capitol gains will still be owed - but he is delaying them by keeping the asset.

1. To further complicate the discussion an investor has at least 3 different ways to not pay capitol gains tax.
2. 1. Keep the property - Taxes are not due until he sells
3. 2. Do a 1031 Exchange, thus moving the taxes due as well as the depreciation over to another property.
4. 3. Die and leave the property to an Heir. 

I believe there are other ways by giving the property away to a non-profit, but I don't know the nuts and bolts for that.

The 2 examples above are simplified obviously.  If he sells he may pay a commission and if he refi's the bank would likely only loan a percentage of the value of the asset,