When Refinancing To Pull Money Out, Is That Tax Free Money?
I know interest is attached to monthly repayment and when the property is sold capital gains taxes apply but what happens with money drawn out of the property?
quinn
I know interest is attached to monthly repayment and when the property is sold capital gains taxes apply but what happens with money drawn out of the property?
quinn
It has no effect. Gains are calcuated on purchase and sale price only (minus deprecation and plus added basis).
So to answer your question again--yes the money you pull out is not taxed in any way. It is not a gain, or income.
GOOD LUCK
A simplified example of myfroggers answer
You buy a house for $100K. You borrow $150K. You sell for $200K.
When you borrowed, the cashout money is not taxed because it is loaned money.
However, when you sell, you will be taxed on a $100K profit ($200-100), so don't go spend happy with that money as you may need it to pay Uncle Sam when you sell.
Roger
Using the same example, what if you sell on a Contract For Deed basis and receive $20,000 down payment (on the $200,000 sale price). Is the $100,000 profit taxable in the year that the initial sale is made and the deed goes into escrow or after the buyer refinances and pays off the deed in full?
If you sell on any type of installment sale contract (like contract for deed) and you have not had the property for at least one year before the sell, then ALL of the "profit" from the sale is taxable in the year that it was sold.
So using the same example, you'd still owe taxes on a $100K profit even though you only got $20K down and some monthly payments that year. You'll also owe taxes against the interest income as well.
Roger
Thanks for the helpful information!