How to reduce Capital Gains?

Question

Does this make sense? Say someone has a house worth $250k thats complete paid off, free and clear. They want to sell it and avoid some capitol gains. So they do a cash-out Refi to put a $200k mortgage on the property (80% LTV) with no prepayment penalty. Then they sell it for $250k. So now the original $200k from the cash out was technically loan aka no taxes. But using the proceeds from the sale the $200k loan is paid back, and only $50k is actually profit.

(Not including a 1031) Is this a good strategy for reducing capital gains??

Are there other ways that you know of?

(Not including a 1031) Is this a good strategy for reducing capital gains??

Are there other ways that you know of?

Ashish Acharya · Answer

Loan has no impact on your taxes. You cannot reduce your profit with the loan payoff.

Generally, Profit/gain  = sales price- original basis - accumulated depreciation - less selling cost.

Eamonn McElroy · Answer

Are there other ways that you know of?

1031 if the property is used in a trade or business, or held as an investment.

QOF.

Installment sale as the property is not mortgaged.

If you have depreciated capital assets, harvest the capital losses in the year of sale.

Offset with a large retirement account contribution in the year of sale (if possible).

Offset with a large donor advised fund contribution in the year of sale (if it aligns with your goals).

All have their own pros, cons and risks.