Tax On Equity?
I am new here and have been reading many of the posts but I haven't clearly seen the following adressed.
We purchased a fixer-upper in february and are in the middle of renovations. The property is in a nice area, houses are selling well and prices are not stagnant. We have the option of selling it, renting, or rent with Lease Option to buy.
We have used our own money to purchase and fix it. Let's say the cost of purchase and fixing is $120,000 and ARV will be $180,000. If we decide to rent it and we get a mortgage for $60,000 (equity) we won't have any taxes due on that money. As I understand it, if a year later we sell the property, let's say for $185,000 our profit would only be $5,000 (more or less) and that is what we would pay taxes on.
Is this a correct assumption or am I missing something very obvious? Also, what if we get the mortgage for the $60,000 then decide to sell a few months later. What would our tax liability be?
Thanks for your help.
The mortgage has no real affect in the way in which you compute gain or loss on the sale of a home. If you are out of pocket $120,000 including all capital improvements the gain would be calculated as follows:
Proceeds from sale $185,000
Less: Acq Cost & imp $120,000
= Total Taxable gain of $65,000
When ever you refinance you have no taxable income to recognize because no sale took place.
It may be worthwhile to contemplate refinancing a 80% LTV if you want to continue to get more properties. You can then use the extra funds as a downpayment on other properties.
Doesn't matter what your loans are. You are taxed on your gain.
Selling price
-costs of sale
===========
Adjusted sales price
Purchase Price
-depreciation
+Improvements
=============
Basis
Adjusted Sales price
-Basis
==========
Gain
Depending upon how many of these deals you do, you may be taxed either based on Capital Gains or as if it were regular income.
Capital Gains is different for short term (less than 1 year) and long term ( greater than 1 year).
Also, I think your Taxable amount would be the difference between your Adjusted Cost Basis of 120K and the sale price (lets say 185K). Taxes have nothing to do with how much you mortgage the property for.
Mind you, this is the simple answer. You should obviously consider spending a couple hundred dollars per year for a qualified accountant to give you Real advice.
This is not correct. You pay tax on the difference between your adjusted cost basis and the sales price of the property. Given your example, your basis is the $120,000. You will pay taxes on $185,000-$120,000 = $65,000 less any deductible closing costs. This gets a lot more complicated if you hold for multiple tax years and depreciate the property. This is a general answer to your specific example and is not meant to be tax advice.
The reason I was questioning this was because when we refinanced our mortgage ( a few years ago) on our primary residence and we took some cash out for needed repairs. As far as I recall we didn't claim it as income because this raised our debt.
Thanks for your quick answers.
Increasing your debt, or paying it down, doesnt affect your Gain.
Quote:... when we refinanced our mortgage ... we took some cash out for needed repairs. As far as I recall we didn't claim it as income because this raised our debt.Borrowed money that must be repaid is not taxable income.
Whether you finance your car, your house, or charge something on your credit card, you don't have taxable income because the money you borrow has to be repaid.