Flipping Tax Question, Is this Legal?

[Shelton Eubanks]

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?   

[Ned Carey]

@Shelton Eubanks nobody that can pass the CPA test would say that. The sale does not show a profit of $30K. The profit is 100k. The tax and the amount you should report has nothing to do with loans.  

You are not taxed on the amount you receive when yo sell a property. The profit is the sale price minus the basis of the property. The basis of the property does not show up on any re-sale documents.

You can get a big check when reselling and still claim a loss of the property. You could receive no check at settlement or even have to bring some money to settlement to sell a property and still have a large profit that you have to pay tax on. 

I will try putting it a different way. Your friend did make a $100K profit when he sold. He used $70k of the profit to repay part of his loan.