Results 1 to 8 of 8

Thread: Taxes on Cashing Out/Refinancing Mortgage

  1. #1
    God/dess britneyireland's Avatar
    Joined
    Jan 2002
    Location
    Dallas
    Posts
    2,568
    Thanks
    283
    Thanked 602 Times in 340 Posts
    Blog Entries
    1
    My Mood
    Inspired

    Default Taxes on Cashing Out/Refinancing Mortgage

    I'm chuckling to myself as I post this on a stripper board...but sometimes I think I get the best advice here!

    I'm refinancing my house and cashing out 35K in equity to put into an investment property. Do I have to pay capital gains on that 35K? I read somewhere that if you invest it in another property within a certain amount of time you don't.

    But it got me thinking about all those commercials for Ditech.com Suppose I "cashed out equity to pay off higher interest consumer debt", and didn't re-invest it in another property...would I have to pay taxes come April?
    Rebecca Avalon







  2. #2
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    Well as you know I'm not an accountant, however I think I have the answer ...

    The capital gains taxes only come into effect when the capital item is sold, be it the house or stock shares etc. Until that ultimate sale occurs, all of the gains only exist 'on paper' not as real money, and no real money no taxes. Therefore as long as you don't actually sell the house you won't owe taxes on any equity you 'cash out' through refinancing.

    The 'rollover' tax exemption would come into effect if and when you did actually sell the house, with the capital gains tax being avoidable if the sale proceeds are used to purchase another house of greater value.

  3. #3
    God/dess montythegeek's Avatar
    Joined
    Oct 2003
    Posts
    2,103
    Thanks
    0
    Thanked 9 Times in 5 Posts

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    Melonie is right of course, but think about it this way. You are borrowing more money. The phrase "cash out equity" is a commercial slogan for borrowing money.

    Also be aware that any points you pay on a refinancing can be amortized over the life of the loan as a deduction. Do not forget this because it can be a fair chunk. Say you paid 2 points on a $200k loan or $4K over 15 years. That is an extra deduction of roughly $266.67 per year or a smaller tax bill of about $60-$80 each year for most people. Only points on a new purchase can be front loaded in the first year.

  4. #4
    God/dess Emily's Avatar
    Joined
    Feb 2003
    Location
    Las Vegas
    Posts
    11,302
    Thanks
    4
    Thanked 143 Times in 72 Posts

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    yeah, I think that's the case.

    When I sold my house a couple of months ago, they had me sign the IRS forms for capital gains...that I was aware and whatnot.

    But when you think about it, what's to say it's capital gain? It's equity. In your case, it may have been appreciation, but let's say you buy a house and put $50k down. You then have $50k to borrow against. But that's not capital gain!

  5. #5
    Member
    Joined
    Mar 2005
    Posts
    37
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    when you sell your home, the first $250k (500k for married couples) of profit is tax free. You take the selling price, less closing costs and reduce that figure by the original cost of the home and any improvements made. You then subtract the $250k from that figure and pay taxes on anything left over. You cannot deduct a loss on the sale of your home.

    The rollover that melonie is talking about is not allowed with a personal residence. Your primary home is taxed as above. No rollovers allowed. The home must be your primary residence for 2 of the last 5 years.

    The old rules were that you could roll the gain into your new home. That went away several years ago.

    If the property sold is business property, you can do a 1031 like kind exchange but the rules are tricky. The basics are as thus: You have an investment property which you sell. You take ALL of the proceeds and purchase a new investment property. Provided you receive no cash from the deal, your gain on the original will be rolled into the cost of the new property. As I said, the rules are strict and any deviation from them will result in the like kind exchange being nullified.

    With regards to the cashing out on a refinance, there is no tax effect, other than an increase in mortgate interest which might have an impact on your taxes , depending upon the amount of the cash out and the change in interest rate.

  6. #6
    God/dess britneyireland's Avatar
    Joined
    Jan 2002
    Location
    Dallas
    Posts
    2,568
    Thanks
    283
    Thanked 602 Times in 340 Posts
    Blog Entries
    1
    My Mood
    Inspired

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    Thanks everyone! So much easier than trying to research it on irs.gov
    Rebecca Avalon







  7. #7
    Member Jon_CPA's Avatar
    Joined
    Nov 2004
    Location
    Atlanta
    Posts
    50
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    Quote Originally Posted by Crakeur
    when you sell your home, the first $250k (500k for married couples) of profit is tax free. You take the selling price, less closing costs and reduce that figure by the original cost of the home and any improvements made. You then subtract the $250k from that figure and pay taxes on anything left over. You cannot deduct a loss on the sale of your home.




    Correct.



    Quote Originally Posted by Crakeur
    The rollover that melonie is talking about is not allowed with a personal residence. Your primary home is taxed as above. No rollovers allowed. The home must be your primary residence for 2 of the last 5 years.
    Quote Originally Posted by Crakeur



    The old rules were that you could roll the gain into your new home. That went away several years ago.




    Close. For personal residences, under the rules for gain or loss arising from an involuntary conversion, the gain in excess of the realized gain over the $250,000/$500,000 exclusion may be deferred if replacement property is purchased.



    Quote Originally Posted by Crakeur
    With regards to the cashing out on a refinance, there is no tax effect, other than an increase in mortgate (sic.) interest which might have an impact on your taxes , depending upon the amount of the cash out and the change in interest rate.


    Home mortgage interest is subject to certain limitations.



    1) Interest on acquisition debt is only deductible on the first $1 million dollars of aggregate debt financing for acquisition. Interest on the excess of $1 million dollars of aggregate debt is nondeductible personal interest.

    2) Interest on home equity is limited to the lesser of :

    a. $100k of aggregate home equity debt

    b. The difference between the Fair Market Value of the principle residence at the time the loan is granted less the amount of current debt outstanding on the property at the time the loan is granted.



    If the proceeds from the home equity is used to buy the rental property then the interest disallowed as interest on the home mortgage is deductible against income from the rental property. However, with rental property you are subject to the rules of passive activity. Passive losses can only be used to offset passive income. If you have no passive income then the losses are suspended until you have passive income, or dispose of the property.



    If you have a steady significant stream of annual portfolio/investment income there are ways to structure your excess home equity interest to become interest on investments. The interest on investments is deductible to the extent that you have portfolio/investment income. Excess interest on investments over the portfolio investment income is nondeductible



    The preferred method is to:



    1) Setup as much of the home equity to be used as mortgage interest.

    2) Set up excess home equity to have enough interest expense to offset the lowest amount of estimated portfolio/investment income over the life of the excess borrowings.

    3) Set up the remainder of the excess home equity interest being deductible against the passive income from the rental property.



    Consult with your financial and tax advisor about this matter.

  8. #8
    Member
    Joined
    Mar 2005
    Posts
    37
    Thanks
    0
    Thanked 0 Times in 0 Posts

    Default Re: Taxes on Cashing Out/Refinancing Mortgage

    Jon, I was referring simply to Melonie's comment. She said "The 'rollover' tax exemption would come into effect if and when you did actually sell the house, with the capital gains tax being avoidable if the sale proceeds are used to purchase another house of greater value." No one mentioned involuntary conversion, so I left that out of the mix.

    with regards to the interest items listed, yes yes yes. Again, rather than spout a tax lesson I gave a basic answer and yes I had a typo in there, thanks for pointing it out.

Similar Threads

  1. Cashing SM checks
    By lolabunny in forum Camming Connection
    Replies: 24
    Last Post: 11-24-2011, 04:50 PM
  2. Club not cashing in funny money
    By Athenathefabulous in forum Stripping (was Stripping General)
    Replies: 38
    Last Post: 12-16-2009, 06:35 PM
  3. Credit card companies cashing in
    By Deogol in forum Dollar Den
    Replies: 11
    Last Post: 10-16-2007, 06:13 PM
  4. info about refinancing... made a bad decision
    By tampafldancer in forum Dollar Den
    Replies: 27
    Last Post: 10-07-2006, 05:41 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •