Another cap-gains Q

[-Tony- 0]

Okay you buy a house at say 50% of value. You hold it for say two years then refinance pulling out all of the equity, do you pay taxes on that?

 

What if you did this before you sold your rental house to get away from cap gains taxes? even if you held on to it for another year or so it seems like it would be advantagess.

 

Okay it's 3:30am I am at work and it makes sense to me, if I am not clear forgive me?

[Dave T 0]

Your profit on the sale of a property is the difference between your purchase price (plus capital improvements, minus allowed depreciation) and your sale proceeds. It makes no difference to the IRS whether you have a mortgage or you own the property free and clear -- your profit is the basis for calculating your federal income taxes. Your profit is not affected by the presence or absence of a mortgage loan. Your tax liability will not change if you refinance just prior to the sale.

 

Now, in some local jurisdictions the amount of proceeds from the sale are used to determine withholdings. For example, in MD when an out of state owner sells his MD property, the state may withhold 4.75% of the "net proceeds" from the sale. One way to avoid this withholding, is to refinance for the maximum loan amount you can get before the sale. This makes the net proceeds from the sale as small as you can, reducing the state withholding to the minimum. In this case, the withholding is based upon the net sale proceeds, not the net profits from the deal, so you might benefit from refinancing.

 

Borrowed money that must be repaid is not taxable income. Refinancing to pull cash out of your equity is not a taxable event because the money must be repaid.