Taxes On A Mortgage Refinace Cash Out Option
If I refinance a property (house) get a lower rate and take a cash out option ($10,000). Do I have to pay Federal taxes and state taxes (GA) on the $10,000? (Capital gains)
If I don't have to pay them up front do I have to pay them when I sell the property?
If you refi and take cash out, you are paying interest on the cash out as well as the principle back. This being the case you do not have a capital gain until you sell the property, and then only if you sell it for more than you financed it for.
Luck!
You pay taxes based on gain when you sell. Properly exchange (1031) and you will defer taxes.
No taxes on borrowed money.
Quote:This being the case you do not have a capital gain until you sell the property, and then only if you sell it for more than you financed it for.telemon,
I hope you mistyped, but just in case you did not let's clear up something here.
Capital gain is computed by subtracting your cost basis from your sale price. Your initial cost basis is your purchase price. The amount of your mortgage (or remaining mortgage balance) is irrelevant.
Using traditional bank financing, you purchase a $100K property as your second home with a $20K downpayment and the $80K balance of the purchase price is financed. Later when you sell the property for $125K, your taxable profit is only $25K (the difference between your purchase price and your sale price) not $45K (the difference between your financed amount and your sale price).
To extend the example, let's say that your $100K property from above has appreciated and you take a cash out refinance for $110K. Now if you happen to sell the property for $125K, your taxable capital gain is still $25K, even though the difference between your sale price and your mortgage amount is only $15K.[ Edited by DaveT on Date 11/12/2003 ]
I am in a situation where I bought a property for someone who had cash, but bad credit, for $300,000. He put down all the money for the down payment, taxes, insurance, closing costs, etc. and I took title in 9/03. We originally signed a L/O to buy the propery from me for $310,000. The propery appraises at $420,000 (Which is why he wanted it so bad). My question is: He is having trouble getting his financing worked out, but he said if I could take out a second of $50,000 and allow him to use that as a down payment (he said his lender did not require seasoned money) then he could close the deal. The new purchase price would be $360,000. Although I would only be realizing $10,000 profit, would I be responsible for $60,000 in capital gains or would the $50,000 2nd not count? Any feedback would be great. Thanks.
you are responsible for the capital gains on the difference of what you purchased the property for and what you sold it for. For example you bought the house for 300K and will sell it for 360K you will owe capital gains on the 60K difference. No doubt about it.
Quote:... he said if I could take out a second of $50,000 and allow him to use that as a down payment (he said his lender did not require seasoned money) then he could close the deal. The new purchase price would be $360,000. Although I would only be realizing $10,000 profit, would I be responsible for $60,000 in capital gains or would the $50,000 2nd not count? strukes,
You have quite a few holes in your scenario. Best to start a new thread and add more details to the structure of the deal.
If you take out a $50K second, then you get $50K cash in hand in addition to the $10K premium the buyer is willing to pay. So it would appear that you will get $60K in taxable income from this deal.
What happens to the equity already in the property? Who gets that? Who is making the mortgage payments now?