Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 7
I’m trying to understand how the cash taken out on cash-out refinance is taxed (or not) when the property is sold.

It's not. The cash taken out is irrelevant for tax purposes.

For example, I invested $50K into a rental property over a decade ago.

Irrelevant. What is important is the price paid for the rental property, not the cash invested.

I refinanced a few years and I took out $75K cash.

That doesn't matter.

Say if I sell it now and make a gain of $100K, I understand that I have to pay capital gains on that.

The gain is the difference between the sale price and your basis in the property. Since this is a rental, your basis is the original purchase price plus purchases costs, add in any improvements made over the years, and subtract off the depreciation that you took, or should have taken, on the property. Cash invested, cash out refinances, and cash proceeds from the sale don't enter into the picture.

How does the $75K cash that I had taken out play into it and how (if it is) is it taxed?

It doesn't enter the picture.

The upshot of all of this is that it is quite possible that your cash out refinances can leave you without enough cash after the sale to pay the taxes due on the sale. That can be a very uncomfortable position to be in.

--Peter
Print the post  

Announcements

Disclaimer:
In accordance with IRS Circular 230, you cannot use the contents of any post on The Motley Fool's message boards to avoid tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.