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

[Ricardo Diaz]

Wow that is what I was afraid off but thank you for explaining it to me and yes that is what I did. Changed it to another entity. Damn. Well that was a bust. 

[Ricardo Diaz]

To follow-up- The house was bought as an investment property under my name. A cash out refinance was done two years ago, and switched under an LLC. When do I have to pay capital gains on an investment property? Is it not like personal property where capital gains is not paid after 2 years ownership?

[Randall Alan]

Quote from @Ricardo Diaz:

To follow-up- The house was bought as an investment property under my name. A cash out refinance was done two years ago, and switched under an LLC. When do I have to pay capital gains on an investment property? Is it not like personal property where capital gains is not paid after 2 years ownership?

@Ricardo Diaz

Capital gains would be due in the tax year you sold the property.  So if you "sold it" to the new entity in 2023, taxes would be due April 15, 2024.  If you are past that tax year, you should probably refile that tax year.  It seems to take the IRS 2-3 years to get around to catching things like that (at least that's what happened when I missed at 1099 one year).  So I wouldn't start thinking you have "gotten lucky" if it's only been a year since it happened... It's likely the IRS just isn't up to that date yet!  Penalties and interest will continue to accrue in the meantime presuming they do come back to you on it. 

All the best!

Randy 

[Ricardo Diaz]

Thanks Randy. I’ll have it looked at in the mean time 

[Bill B.]

Wow. Why did you do this and why did your accountant let you? You generated a tax bill you didn't need to. Unless your purpose was to sell half the property to a partner? (In which case you probably could have skipped the LLC and just added him as a joint tenant and paid half the taxes?

[Basit Siddiqi]

You may want to see if this can be considered a contribution into an LLC instead of a sale.

It would result in drastically different outcomes.

[Ricardo Diaz]

Yep learning the hard way. Did not consult with a professional as to what would be the tax benefits. And now since I want to dissolve the llc and sell the house almost 3 years later i have to ask what is the best way to not pay taxes because I do want to put it into another investment.  Believe me I have done couple things without consulting with someone who knows.