Taxes from cash out refinance

[Ricardo Diaz]

I have a a tax question. I cashed out refi a property under my name into an llc for me and my partner. We took money out and left it into the account.  Now I took money out and my accounts tells me it will be taxed. I thought debt is not taxable.  

[Randall Alan]

@Ricardo Diaz

If you really only did a cash out refi, the proceeds from your cash-out refinance are not taxable. The money you receive from your cash-out refinance is essentially a loan you are taking out against your home's equity. Loan proceeds from a HELOC, home equity loan, cash-out refinance and other types of loans are not considered income.

BUT... it sounds like you didn't do a cash out refi (where the property stays in your name)... you in essence sold your property to a new entity (the LLC that has it's own separate tax ID number - so it definitely isn't "you"). So if that is what you did, you would likely have to recognize any capital gain from the sale and pay taxes on it. Not only that, depending on how long you had the property, you will probably see your local taxing authority reset the tax basis as well. So if you bought the property for $100,000... but now transferred it to the LLC for $200,000 and pulled out say $75,000 in cash, the appraiser will now value the property at $200,000, and not $100,000 (less about 20% usually) and your taxes will be based on that higher valuation. (it happened to us!). Any savings you may have accrued on assessed value will likely be lost as well... so don't be surprised to see your taxes jump the next time the property appraiser reassesses the property.

All of this is my best guess interpreting what you wrote in your question.  

All the best!

Randy