I like the way you think, but Michaela is accurate. In fact, since you’ve owned it for years, you’ve been depreciating the property. Every dollar you’ve deducted for depreciation over the years decreased your basis by the same amount. The financing doesn’t affect your basis, so you’d pay capital gains taxes on the difference between the sales price, and the 55K plus renovations, less accumulated depreciation.
You can consider a 1031 exchange if you plan to purchase more real estate to defer the taxes.
Posted by koffee on February 08, 2006 at 14:44:41:
I have an investment property that I purchased for 55K years ago. I owe about 10K on the loan. Homes on the block are selling for 300K. I keep hearing "there is no tax on borrowed money. That said, if I refinanced now and took out 200K, and sold it 6 months later. Would I reduce my (1040) income taxes; because the 200K borrowed is not taxed?
Posted by michaela-FL on February 08, 2006 at 15:05:57:
Koffe,
Your purchase price of 55K (plus any renovation that you may have done) would be considered your basis.
If you get a mortgage for 200K, then you don’t pay taxes on that money at the time that you get it.
If you later on sell the property for 300k. Then you
will have to pay taxes on the spread between your basis (55k) and your salesprice (300K). So, taxes would be paid on 245K. This is simplified, because you may have other expenses like closing etc., but that’s it in a nutshell.