Posted by Dave T on November 17, 1998 at 13:43:03:
You do not pay capital gains on borrowed money. But, the sale of your investment property will be a taxable event. Thus in your example $11K (less closing costs) would be considered taxable capital gains.
You are under no obligation to cash out the loan on your primary residence. Instead you could consider using your profit to buy another investment property. If you do a 1031 exchange, all your profits could be deferred from capital gains taxes, while your next investment increases your net worth.
I got a 75% first mortgage for $33,000 on my primary residence to purchase an investment property (rehab) for $27,000, using the remaining $6,000 for closing costs and rehab.
Can I refinance my primary residence for $44,000, getting roughly $11,000 back at closing, and then sell my investment property for around $44,000 to pay off the note on my primary residence, thus avoiding capital gains, and other taxes? Or will I still have to pay for the profit I made on the investment.