Three Situations Resulting in No profit, but taxable gain
This post is add-on #3 to my recent newsletter. Information compliments of Julie Tumbaga the Vice President, Hawaii Regaional Manager of Orexco1031
Excess Borrowing
If a taxpayer borrows against appreciated equity in their property, tax consequences can also result if the property thereafter declines in value and the taxpayer is forced to sell the property for little or no profit.
eg Taxpayer acquired property A for $1,000,000 paying $200,000 cash and borrowing $800,00. Taxpayer's basis is $1,000,000. During Taxpayer's ownership, the property appreciates in value to $1,400,000 enabling Taxpayer to refinance the existing loan of $800,000 with a new loan of $1,120,000. Taxpayer now sells, but since property values have declined, his selling price is $1,120,000. Although Taxpayer will receive no cash from the sale, he will still have taxable gain of $120,000 ($1,120,000-$1,000,000=$120,000) with combined federal and state taxes of $42,000
