Avoiding Capital Gains Tax

[Blake Mgbada]

Does this situation sound feasible?

Let's say I completed a live-in-flip as a single person. When I sell my house, I have over $300k profit. I have to pay capital gain tax on the $50k surplus. 

What if I refinanced for $100k before I sell the house. I now have $100k note to pay off. When the house sells, I would essentially pay off the $100k note and make $200k from the sale. This is under the $250k requirement. Now I have $100k from the refinance (paid off) and $200k profit. Theoretically, I believe this may be a way to avoid capital gains tax on any profit over the $250k cap. Thoughts? 

[Jaysen Medhurst]

Nope, @Blake Mgbada. Your debt doesn't factor into the calculation. If you bought for $100k and sold for $400k, the IRS sees $300k of capital gains. Also, you have to have lived in the property for 2 of the last 5 years for it to qualify in the first place. BTW: you're probably in the 15% bracket, so you're talking about $7.5k on $300k profit. That's an effective rate of 2.5%, not too bad.

If you really want to defer (not avoid) the CGT, you can rent the property for a few years after moving out. Then do a 1031 exchange when you sell and roll the money into a new investment.

OR, just get married and double the exemption!