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This is the question:
If I brought a house for 50k and refinance and took a loan for 100,000k, now owe $120,000 and sold it for $130,000. Do I pay capital gain on –
$50k – $130,000 or $120,000 – 130,000?
The gain or loss is calculated based on:
Cost of Sales
+ Accumulated Depreciation, if applicable
= Gain or Loss
The loan that you had previously taken doesn’t play into the gain or loss calculation at all. That is how some people have gotten in trouble, though. They will receive the equity in the property, less expenses. But they have to pay tax based on the basis. The IRS views that cash out refi as you receiving your cash early. There is no deduction for that.
As an example, if your house sold for $130,000 with $7,800 for cost of sales and $50,000 basis (assuming no accumulated depreciation), the gain would be $72,200.
If this is a home you lived in, remember you may qualify for the capital gains exclusion.