Cashout Refi to avoid cap gains when selling?

Tax, SDIRAs & Cost Segregation
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Cashout Refi to avoid cap gains when selling?

James R. CopelandPro Member
Investor · Port Hueneme, CA · Member since 2017 · 73 posts · 34 votes
Hey there, just a theoretical question: Borrowing money via a loan or cash out refi isn't taxed as income since it's borrowed. If you were to sell a rental house without a 1031 exchange, I *believe* the portion that you have to pay capital gains tax on is the sale price minus the amount owed, right? So if somebody owned a 1 Million dollar rental property and sold it outright, they'd pay cap gains on $1M. If, on the other hand, they did a cash out refi to take it to 80% LTV, aka borrowed 800k against it, then sold it, wouldn't they only owe cap gains on the 200k remainder? I'm assuming one of my assumptions is incorrect. Can somebody clear this up for me?
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Wayne Brooks
Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
8y

No.  Your loan amount has bearing on cap gains tax due.....it’s is calculated on your costs of the property verses your sales price, less actual selling/closing costs.....doesn’t matter if you borrowed 100% or paid all cash.

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    No.  Your loan amount has bearing on cap gains tax due.....it’s is calculated on your costs of the property verses your sales price, less actual selling/closing costs.....doesn’t matter if you borrowed 100% or paid all cash.

    2Reply
  • Ashish AcharyaBusiness Member
    CPA, CFP®, PFS · Sarasota, FL · Member since 2017 · 5k+ posts · 3k+ votes
    8y
    Originally posted by @James R. Copeland:
    Hey there, just a theoretical question:

    Borrowing money via a loan or cash out refi isn't taxed as income since it's borrowed. If you were to sell a rental house without a 1031 exchange, I *believe* the portion that you have to pay capital gains tax on is the sale price minus the amount owed, right? So if somebody owned a 1 Million dollar rental property and sold it outright, they'd pay cap gains on $1M.

    If, on the other hand, they did a cash out refi to take it to 80% LTV, aka borrowed 800k against it, then sold it, wouldn't they only owe cap gains on the 200k remainder?

    I'm assuming one of my assumptions is incorrect. Can somebody clear this up for me?

     Loan on the property has nothing to do when calculating gain. Your basis determines gain. Loans comes into play in determining if you get to keep the proceeds from the sales.

    Let’s say you sell the property. Simplified to clear the concept. 

    Sell price 1M ( this is your proceeds) 

    Basis 500k

    Gain: 500k. 

    So, let’s see if you had loan vs no loan. 

    1) no loans: 

    You get to keep entire 1M 

    2) 400k  loan 

    You get to keep 600k 

    3)  800k loan

    You get to keep 200k. 

    All the three cases have same gain, 500k. 

    Hope that helps. 

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  • Mark Creason
    Real Estate Lender and Broker · Dallas, TX · Member since 2013 · 966 posts · 500 votes
    8y

    @Wayne Brooks

    I think you meant to add a no in your first sentence.

    Tax would be sales price minus adjusted basis.  Depreciation recapture would be 25%.  Cap gains on the balance of profit.

    Mark

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    8y

    Correct “has No bearing...”.

    0Reply
  • James R. CopelandPro Member
    OP
    Investor · Port Hueneme, CA · Member since 2017 · 73 posts · 34 votes
    8y
    Thank you! That helps, makes sense now.
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