Taxes: Personal distributions from a Refi

[Anthony Gagliardi]

My business partner and I own a few investment properties under an LLC. We bought one last year, renovated it ourselves, and didn't pay ourselves a dime for labor. The mortgage we took out covered the purchase price plus the cost of materials.

We are closing on a refi soon with a surplus that would give us a nice cushion for the business (covering future repairs & maintenance, vacancy, CapEx, property management etc) and leave us with an additional amount that we could either roll into the next property (brrr), or take for ourselves.

We asked our accountant about what we can do with the proceeds from the refi, especially with regards to taking some for ourselves. She said that you CAN take proceeds from closing without paying personal income tax on it as long as the business’s tax returns reflect a corresponding decrease in your cost basis for the property (by the same amount you take).

Here’s how we understood it: if the refi amount for example is 100k and we take 10k, the cost basis when we go to sell the property sometime in the future will be lowered to 90k. Meaning, when we go to sell in the future, the business will owe that much more in capital gains tax (we know our yearly depreciation lowers our cost basis as well).

That has been hard to wrap our heads around. Does anyone else have experience in this scenario? Our accountant made it seem as though this is a relatively common practice (and also one of the big perks of investing in real estate). She also mentioned that people who do it and don’t realize it lowers their cost basis are in for a big surprise from the irs when they eventually sell. Our properties cash flow nicely, and we’ll be looking next year to finally take a monthly draw. The draw we’re told, will be personally taxable since it’s like taking a salary from the business- that all makes sense. We just want to know that the 10k we’re looking to take can be done in a way that just kicks the tax can down the road to be paid when we sell the building.

Thanks!