Capital Gains On Heloc
I understand that I will not face an immediate tax consequences upon taking out a heloc or a second on an investment properties equity. But what about the sale of the property 1 year later. Will I be faced with capital gains tax on the equity I received in the form of a cash-out refi 1 year prior to the sale? or just the profits from the sale?
thanks
danjames
Your capital gain on the property does not depend on the financing of the property. The capital gain is the net sales price less the basis in the property. The basis usually starts at your purchase price and may go up or down depending on what you do. If you make capital improvements your basis will increase the amount of the improvements. If you depreciate the property, your basis will go down by the amount of the total depreciation. So, when you sell you will have two components in your capital gain. There will be a component due to appreciation and capital improvements and a component due to depreciation. At the Federal level the depreciation component is taxed at 25% while the appreciation and capital improvement component is taxed at 15% for most investors.
Just to piggy back on the previous response.
If you stop to think about it, the cash you took out from your refinance IS the bulk of your profit. So, in a sense, your cash out is an advance on your taxable profit.