Possible Tax Upon Sale Following Cash-out Refinance Question

[Jason Bohling]

So was wondering about this and didn’t see a straight answer in the forums. Sorry if this is a dumb question. Hypothetical scenario, ignoring closing costs and commissions and fees to simplify things, just trying to gain better understanding.

In this scenario a home is purchased for $100,000 with a $100,000 mortgage.

It appreciates over the years to $300,000, with the current mortgage balance at $75,000.

Then, a cash-out refi is done for $200,000, paying off the $75,000 current mortgage and pocketing the remaining $125,000.

Here’s the question:

If, say a year after the cash-out refi, the home is sold for $350,000, would you pay tax on the current difference of $150,000 ($350,000 sale price-$200,000 current amount owed)

Or,

Would the IRS think you’re trying to evade taxation and tax you on the sale price-the amount owed at the time of the cash-out refi ($350,000-$75,000)?

Thanks in advance, everyone.