Capital gain tax on investment property

[Daniel Scott]

I have a rental townhouse that we wish to sell when the current lease is up, in about a year. We owe around $100k and its valued at roughly $185k.

My question is how will I be taxed due to the capital gain if I do a cash out refinance prior to selling?

[Derek Kirkwood]

The capital gains exemption mentioned by @Jen Nelson is only for your primary residence. You didn't say exactly, but I get the impression you don't live in this town house. If its not your primary residence there is no capital gains exemption. You can defer the tax by doing a 1031 exchange but that only defers, there is no way to avoid it completely.

You can add any costs of improvements you did to the basis, but ultimately you're going to pay tax on the difference between the sale price and your cost basis. As others have pointed out, the IRS doesn't care how you have it financed.