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Updated almost 6 years ago,
Flipping Tax Question, Is this Legal?
I was talking to a friend of mine and he mentioned that he is refinancing his deals just before he sells them to elevate his cost basis. For example
actual money spent/cost basis $100,000
appraised Value $200,000
Refi $170,000
Sale price $200,000
the sale shows a taxable profit of $30,000
actual money spent taxable profit is $100,000
so by elevating the cost basis through the refi they have dropped their taxable income by $70,000 and put $70,000 in non taxable income in their pocket (non taxable since it is borrowed in the refi). still made the same amount of money but got to keep more buy showing a lower taxable income.
I can see how the refi with cash out is legal and I see how at closing the loan gets paid and it shows a smaller taxable profit. My question is that if used in combination with each other is this legal? It appears that its just a way to artificially inflate the cost basis to lower the tax burden. They swear that the CPA they use supports this as legal and that they have been doing it for years. If this is legal it's a really great strategy.
Any tax people in here that can weigh in?