dodging capital gains?

Im probably over looking some fundamental issue here, as somebody would have already thought of this before, or maybe somepeople do it, I dont know. But im curious, and new to investing so bare with me. I recently read an article in a magazine I subscribe to that has a company offering a 95% cash out refi to investors(that may be a stretch in itself) but if thats true, heres my question.

Im gonna use the numbers on a deal I have now.
purchase price=62k
rehab,closing costs=15k

could I refi this property at 95% or $114k pocket 37k-minus closing, say 32k then sell the property for $120k and after realtor fees and closing have no capital gain?? I understand that a big part of this equation depends on what tax bracket your in also.

Well, somebody tell me why this is stupid or irrelevant! Im ready!

You still have the same capital gain…

$120K - 15K (fix-up/closing) - 62K (basis) - 7.2K (6% Realtor fee) = Captal Gain of $35,800

The amount that you have it mortgaged for is irrelevant.


Im not sure I understand your answer, I thought that you didnt have to pay taxes on borrowed money. I would have a mortgage for 114k??

So…? When you sell the property, you still have to settle all of the outstanding debt. The capital gains are calculated as I described whether the property is mortgaged at 0% of value, 125% of value, or something in between…

I already told you what the capital gains calculation would be (based on the numbers that you provided…) – $120K - 15K (fix-up/closing) - 62K (basis) - 7.2K (6% Realtor fee) = Captal Gain of $35,800.

When you go to close on the sale, the buyer will give you $120K and you owe your lender $114K…so you’re only going to net $6K less any closing costs on your side of the HUD-1…


exactly, after realtor fees I would have a net profit of zero dollars,so theres no capital gain. either your misunderstanding something or ive been totally misled about refinancing by several people. thanks though ???

I may be misunderstanding something as well, but based on the information you provided I get the same capital gains number.

Purchase price: $62,000
Add, closing costs: $15,000
Add, commission: $7,200
Total: $84,200 (adjusted basis)

Sales price: $120,000
Minus, adjusted basis: $84,200
Total capital gains: $35,800 (amount realized)

I’m not sure I understand why your proposed loan with the bank makes any difference to the amount owed in capital gains tax? The bank’s loan is a seperate deal/contract between you and the bank, and has nothing to do with capital gains tax.

Am I wrong here?

o.k, I guess that like I said, Ive over looked a simple issue. I thought that if you bought a home and then refinanced it, the amount financed then became the adjusted basis. just to make sure I understand, please look at this example( then ill drop it!)

lets say you buy a house for 10k dollars, later you refinance it for 30k dollars and put 20k in your pocket. you now have a 10 year mortagage for 30k. you pay that 30 k with interest down to the last dime. then sell the house for 30k. You are responsible for paying capital gain taxes(even though there is no gain) on 20k dollars???

Yes. But the statement “(even though there is no gain)” is not true. You did have a gain in capital of $20K…you paid $10K and sold for $30K. If there are no other adjustments to that amount (i.e., “capital improvements” or qualifying expenses), the gain in your “capital asset” increased by $20K.

In a nutshell:

Capital gains = the Full amount realized minus the cost basis, minus any capital improvements, minus any qualified expenses.

It makes no difference as to the amounts of any notes and mortgages.


o.k thanks for working with me on that! I guess I get it now. I just wasnt considering money that you borrowed and payed back with interest a gain.

hey kdhastedt,

so when people say “cash out with tax free money” what that really means is you dont have to pay taxes on the money until you well??

Hey, not question is stupied or not important. The more you learn the better.

I think your situation has two seperate parts. Getting a loan has no bearing on figuring capital gains on a property. Capital gains mean the profit earned from the [/i]sale[i] of an asset, your purchase price minus selling price (gain/loss). This has nothing to do with a bank loan.

The guidelines of calculating the capital gain in your situation remain the same. I can see where it might get confusing when trying to relate a bank loan to the equation.

Remember: Adjusted basis = purchase price + closing costs (only) + capital improvements. Amount realized = sales price - closing costs (only). Capital gains = Amount realized - adjusted basis.

dang it, SELL

thanks surrealstate, appreciate your help

As you hold a property, it usually increases in value…by refinancing or opening a line of credit agains the equity, you can draw funds off of the property tax free. You do, however, have to pay these funds back, usually with interest.


Re invest back into real estae. See your CPA.