L.L.C.'s/Refinancing as a Tax Saving Strategy/Distribution of Refi money

Hello, everyone, I have a question about using refinancing as a tax saving strategy as owner/owners of an L.L.C. I have read the following about refinancing and partners in the L.L.C.
If a owner/owners in an L.L.C. decide to refinance a property:

  1. One partner will refinance the property in his name or you find a lender that will alllow the L.L.C. to refinance pending a personal guarantee.
  2. The L.L.C. can or will distribute the funds obtained from the refinance in the form of company checks payable to the owner/owners of the L.L.C.
  3. The checks that are disseminated from the L.L.C. (profits from the refinance) to the owners is not subject to taxes.

My inquiry is it a wise tax savings strategy if a property has a substantial amount of equity to:

  1. Only refinance 75-85% of property’s equity in order that you will pay less taxes upon the equity remaining in the property when you sell?
  2. If you decide to perform a 100% refinance, and you have actualize no gains or profits upon selling the property, would the I.R.S. consider taxing some of the profits that were earned by refinancing the property?

uh, refinancing and taking cash out is not the same as gain upon sale. The former will have no effect on the latter. Your gain is calculated based on your purchase price and other adjustments. You will recognize and pay tax on the gain even if you do not realize any cash at sale.

all this refi would do is put time between recognizing the gain (upon sale) and realizing the cash from the deal (upon refi).

Of course, having access to this cash for that period of time is not necessarily undesirable. Just recognize that it doesn’t affect your gain/tax.

Let me add one thing here. As Mark states, taking cash out of properties due to refinancing does not affect capital gains. There is no tax savings. No tax effect.
Having stated that, here is a scenerio that I have run into with clients. Quite a few of my clients have owned rental properties for many years. Some of them have refinanced the same property several times to pull money out whether to purchase additional property or just spend. Then the day comes when they want to sell the property. If they don’t consult with me first, several of them have owed almost as much in taxes as what they actually received from the sale. If they consult with me first, no problem… I will tell them how much they will owe and will also review Internal Revenue Code Section 1031 Tax-Deferred Exchanges.
Anna, CPA

Thank you for the additional advise Anna, C.P.A. I understand that before I perform a refi, I need to consult a tax advisor. I should tell the tax advisor the amount of money I plan to withdraw out the property by refinancing. Also, I should expect the tax advisor to provide me with an accurate estimate on the amount of taxes owed to the I.R.S. upon sale of the property within a given time period.


I think you are misreading the messages from Mark and Anna.

A refinance is not a taxable event. No need to consult a tax advisor prior to a refinance.

The tax advisor will not be able to give an accurate estimate of the amount of taxes owed IRS upon future sale of the property. The tax advisor can make certain assumptions (net sale price, for example) and then show you how to subtract your adjusted cost basis from the net sale price to determine your capital gain. The tax advisor can also show you how to determine how much of your gain is subject to the 25% tax on unrecaptured depreciation and how much is subject to the 15% tax on long term capital gains.

An accurate estimate of a future event, when appreciation and final sale price is not accurately predictable is a bit of a reach.

What Anna is trying to tell you is to consult your CPA/tax advisor before entering into a taxable sale to see if there are tax deferral strategies that might be used to your advantage. Consulting after the sale is too late.

Dave T, your responses has helped me alot. Thank you.