Capital gains question

[David Williams]

If I owe $350k mortgage and I take out $100,000 HELOC and spend it on say a 6 month CD,

And then I sell the house for $700k

I would only have $250k profit right? Then I’d avoid capital gains tax in Massachusetts?

[Ashish Acharya]

No, taking out a HELOC and spending it does not reduce your taxable capital gain when selling your home. Capital gains are calculated as:

Sale Price - (Original Purchase Price + Capital Improvements + Selling Costs) - depreciation (if applicable) = Capital Gain

Your mortgage or HELOC balance does not affect this calculation—it only determines how much cash you take home after the sale.

In Massachusetts, if the home was your primary residence for at least 2 out of the last 5 years, you may qualify for the Section 121 Exclusion, allowing you to exclude up to $250,000 (single) or $500,000 (married filing jointly) of the gain from federal capital gains tax. Massachusetts has a 5% state LT capital gains tax, but it generally follows the federal exemption rules.

If the home was a rental property, the exclusion does not apply, and you may also owe depreciation recapture tax (typically taxed at 25% for federal). If your gain exceeds the exclusion, you’ll owe capital gains tax on the remaining amount.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.