Posted by Ronald * Starr on October 19, 2001 at 16:16:50:
You are right. “When it seems too good to be true, it probably isn’t.” Think “IRS.” What comes to mind? IRS: “Let’s let real estate investors not pay any taxes on the gain of the sale of their property if they just do some refinancing.” or IRS: “Let’s get the taxes on the gain on the sale of their property, even if they don’t have any cash coming out of the sale because they financed it all out already.”
I vote for the later. So does the IRS.
I can not figure out what that person was thinking who told you that the loan amount reduces your taxible gain. I don’t know of anything that could cause somebody to think that. Maybe wishful thinking.
The capital gains tax is simple: tax on the capital gain which is the net sales price less basis. The net sales price is the gross sales price less expenses of sale, including recent fixup done to make the property more saleable–in the last 90 days before the sale, if I recall correctly. The basis is the purchase price less depreciation “taken or could have been taken” – means if you could have taken depreciation and did not, tough, IRS will still reduce the basis by the amount you could have taken–plus cost of capital improvements to the property.
That’s it. Simple. Oh, did you notice anything at all about borrowing money there? Loans? Mortgages? No. The IRS doesn’t care about the loans. And they don’t care how much cash you actually got out of the sale. If you did 100% finance last year and sell this year, you might have zero cash out of the deal now, right? Ok, fine, but you still have to pay taxes on the gain on the sale of the property. Where is the money to come from? The IRS doesn’t care. That is your problem.
Good Investing******Ron Starr