Posted on: 15th Feb, 2012 12:45 pm
Hi, I bought a house. lived in it for five years. the house rose in value, and I refinanced raising my mortgage, and getting cash out. Later I sold the house at a profit. Is my income based on the original purchase price, or the refinanced total paid back to the bank. For instance, lets say I bought a house for $1,000,000. I later refinanced with a cash out of $300,000. Then I sold the house for $2,000,000. Is my gain $1,000,000, or $700,000. I ultimately paid $1,300,000 for the house, because I still had to pay off the entire mortgage to the bank - actually only walked away with $700,000. Also, does it matter how I spent the $300,000? - Thanks!
Not only can you use the more normal types of finance, including lines of credit, etc., but the class (or term) for loans that are made exactly to do so is called "bridge loans" or "bridge financing". Generally because it bridges you from one to the other property. (If you are doing this to have the funds to close on a second property, you can sometimes arrange financing that essentially will cover both, with the first one dropping off at sale, called a blanket mortgage).
Understand, the mortgage company has nothing really at risk if you are selling, as their loan is secured to the property and they will get paid sale proceeds before you. And consider how much you would pay on say a 30 year loan you refinanced every year. Lots and lots of fees and up front interest, and at the end of 30 years, you wouldn't have paid any principal really and still owe the original amount! The early payoff of loans is one of the major income factors for lenders.
:idea:
Understand, the mortgage company has nothing really at risk if you are selling, as their loan is secured to the property and they will get paid sale proceeds before you. And consider how much you would pay on say a 30 year loan you refinanced every year. Lots and lots of fees and up front interest, and at the end of 30 years, you wouldn't have paid any principal really and still owe the original amount! The early payoff of loans is one of the major income factors for lenders.
:idea:
I just have to say that you should reconsider if you are cashing out all of your equity. This is a changing market and you may end up with a higher payment on a loan that is higher than the value of your house. Credit card debt and car payments should not be paid using the value of your home--it will not get you ahead in the long run.
Most people that answer here are mortgage people, not accountants.
It is not proper for mortgage people to answer accounting questions.
That being said, check with an accountant.
I "think" your capital gains is based on the sale price minus the purchase price minus the cost of any capital improvements. The mortgage amounts and cash out and what you spend the money from cash out on have nothing to do with the computation of what is your capital gain.
After that number is arrived at, then you subtract your allowable exclusion and what is left is your amount on which capital gain tax is to be paid.
It is not proper for mortgage people to answer accounting questions.
That being said, check with an accountant.
I "think" your capital gains is based on the sale price minus the purchase price minus the cost of any capital improvements. The mortgage amounts and cash out and what you spend the money from cash out on have nothing to do with the computation of what is your capital gain.
After that number is arrived at, then you subtract your allowable exclusion and what is left is your amount on which capital gain tax is to be paid.
