Ashley:
This is Real Estate Rookie episode 202. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information and answers to your question that you need to hear to help kickstart your real estate investing journey. And today we’ve got another question from the Real Estate Rookie Facebook group, which by the way, if you have not yet joined, it is honestly one of the most active, the most engaged real estate investing Facebook groups out there specifically dedicated towards new investors like yourself.

Tony:
Today’s question comes from Brandon Thomas, and Brandon’s question is: “On a cash-out refi, is this considered income? If so, will I have to report it on my taxes?”

Tony:
Brandon, I love that you asked this question because I think a lot of new investors are probably thinking the same thing. I’ll at least give my answer with a bit of a backstory. So before I started investing in real estate, I remember it was my first big boy job out of college, and I was talking to a coworker and he talked about how he had refinanced his home and he got, I don’t know. $50,000 back. And I was like, “Oh man, that’s great.” I was like, “But aren’t you going to have to pay taxes on that?” And he was like, “No, I don’t have to pay taxes on it.” I was like, “But it’s money that you’re getting. I thought anytime you get money from anything, you got to pay taxes on it.” He was like, “Well, technically it’s a loan. A cash-out refi is you putting a new loan in place. And a loan is a liability. It’s not necessarily an asset. So you don’t have to pay taxes on debt.”

Tony:
If you go out and you get a $500,000 loan for a house, they’re not going to tax you on that $500,000 because it’s a liability you have to pay back. If you go out and buy a new car and spend $30,000 on a car and you get a loan, you’re not getting taxed on that loan because it’s debt that you have to pay back. And a cash-out refinance is the same thing. So to answer the question, Brandon, if you get a cash-out refinance, you are not liable for paying taxes on that money.

Ashley:
That’s 100% correct. And I’ll go one step farther and give you an example of when you would actually be taxed on it. If you have a business entity such as an LLC and the LLC goes and gets a mortgage on a property or cash-out refinance and say you’re pulling out $50,000. If you take that money out of the business bank account, you put it into your personal bank account and you go and put a pool in your backyard with that money. And you have pulled that money out and you’re not going to repay your business back, then you would be taxed on that, and that would be money you were taxed out of.

Ashley:
In LLC, it’s usually put onto your, if it’s a single member, LLC, or even if it’s a partnership, you’ll get a K-1 and it usually passed through entity, they call it, so it shows up on your personal tax return. And it would show that you took an owner’s draw of $50,000 from the company, and then you would be paying the tax on that $50,000 draw.

Ashley:
We talked about in our last Rookie reply about accurate bookkeeping. So if you go and purchase a property and you’re going to do the birth strategy and do that cash out refinance, and you are going to put in $50,000 of your own money, make record of that in the bookkeeping that you are loaning the business $50,000 and the business must pay you back so that when you do go and take that cash out refi, you pay yourself back that 50,000. So that is the one scenario that if you have your LLC, you have your corporation, you have your entity and you do do a cash out refinance, and the business didn’t already owe you any money and you want to pull some money out for a personal expense, then you would be paying taxes on that money.

Ashley:
That’s at least the only scenario I can think of that you would actually be taxed on that money that’s coming out of the entity. But if you are just doing a cash out refinance on your primary residence, or a property you owned personally, that’s a loan that you’re paying back personally so you want to be taxed on it.

Ashley:
Well, thank you guys so much for joining us. I’m Ashley at Welcome Rentals and he’s Tony at Tony J Robinson. And we’ll see you guys on Wednesday when we are back with a guest.