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Capital Pains - Is a loan part of the taxable gain?
Old 05-04-2021, 01:33 PM   #1
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Capital Pains - Is a loan part of the taxable gain?

My eyes are about to fall out from googling capital gains information in relation to a home sale, and I still can't find what I'm looking for.


My hunch is that a taxable gain is, at is most basic level, the difference between what a home costs and what it was sold for.



Most of the capital gains calculators simply ask the original price of the home and the sale price, but here's the thing, what if you bought the house with a loan?


Example: Home purchased for $50k down + $350k loan. Three years later when the home is sold, there is $200k remaining on the loan. The home sells for $800k.



In calculating the gain from the example, it would seem that the $200k remaining loan balance is not part of the gain, i.e. the bank invested this money, and every last dime of the loan amount is going back to the bank, and not yours truly. ... And yet from what I've read, it seems that this loan amount is being included as part of my taxable gain.


Is the loan amount deductible, or am I really taxed on this money (that I never get to hold in my grubby little hands)?


I'm hoping one of you real estate Jedi masters might know the answer here, because I've tripped all the breakers in my brain trying to deduce the answer.
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Old 05-04-2021, 01:38 PM   #2
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The loan balance is unrelated to the gain calculation. In your example, the cost is $400k, the sale price $800k, so the gain is $400k.

Edit to add - you paid $50k, borrowed $350k. With the $800k sale price you repay the $200k mortgage balance and have $600k in cash left over. After paying yourself back for the original $50k cash and $150k you paid into the mortgage, you’re $400k ahead, and it’s all in your hands.

If you’ve lived in the house part of the gain may be exempt from capital gain. If you spent money improving the house, you may be able to add that the cost of the house, which would reduce the total gain.
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Old 05-04-2021, 02:14 PM   #3
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Quote:
Originally Posted by MichaelB View Post
The loan balance is unrelated to the gain calculation. In your example, the cost is $400k, the sale price $800k, so the gain is $400k.

Edit to add - you paid $50k, borrowed $350k. With the $800k sale price you repay the $200k mortgage balance and have $600k in cash left over. After paying yourself back for the original $50k cash and $150k you paid into the mortgage, you’re $400k ahead, and it’s all in your hands.

If you’ve lived in the house part of the gain may be exempt from capital gain. If you spent money improving the house, you may be able to add that the cost of the house, which would reduce the total gain.
^^^This

Capital Gains = Increase in value minus purchase price (regardless of loans) minus money spent on improvements

Edit to Add: When selling your primary home, you can make up to $250,000 in profit or double that if you are married, and you might end up not owing anything in capital gains tax...
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Old 05-04-2021, 02:28 PM   #4
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+1.
For example, we bought a house in 2015 for $275k. 2.5 years later, we sold it for $438k. We had gained $163k. Loans have nothing to do with it.

If I was single and had a gain of $300k, I'd keep track of expenses incurred in upgrading the property to reduce the gains, if possible, to $250k (maximum tax free gains for single folks).

Married folks are maxed to $500k gains if living there more than 2 years. 2 years timeline is an important part of it too...
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