Huge tax shock that came back to haunt me.

[Sean N.]

So hearing everyone talking about doing cash out refi's to buy more property I did but it came back to bite me in the butt.

I bought a rental house back in 2012 and naturally values went up so after a couple years I did a cash out refi and used the gain for the down payment on another rental property.  Fast forward a couple more years and the value went up again so I did a cash out refi and used the gain again to buy another rental property.  I sold the house last July and my account says I'll owe on the gains of all 3.  The 2 cash out gains and the gain on the sell even though I used the gain on the first 2 refi's to buy rental property and didn't use it to do any repairs on the 1st rental property.  I'm not saying she's wrong but I'm guessing these are questions I should have asked before I did that but how do I know what questions to ask if I don't know what questions to ask (aka, you don't know what you don't know).

Any way or thoughts I can try to limit my the taxes that are owed?  Or maybe this is just a heads up for any future investors thinking of doing the same thing.

Thanks

[Michael Plaks]

@Sean N.

As other people already said, your accountant is correct. 

While I understand your frustration, it really was not economically sensible to expect a different result. If you bought a house for $63k and sold it for $270k, and you have NEVER paid any taxes on this house appreciation - why would you expect this gain in value to be tax-free in the end?

Where I'm not with your accountant is in her failure to alert you that you had an option to defer this capital gain via a tax strategy known as 1031 Exchange. But it had to be structured before you sold the property, so it's too late now.

And there were other options to deal with your capital gain, but they are also too late to pursue now.

Lesson for everyone: You save taxes by planning forward, not after the fact. Work with an experienced tax planner/strategist specializing in real estate and not merely a general tax preparer. It costs more, but it's so worth it. This forum features 20+ of us.

Consolation: an excellent point made by @Matt Devincenzo that you DID benefit greatly from being able to refi (and twice!) without paying taxes and deploy your tax savings towards growing your wealth. Yes, these savings were temporary but nevertheless valuable.