Why is Debt from a Refinancing Tax Free?

Have heard this is the case. Let's say you refinance an existing loan and receive $15mm. You pay off an existing $10mm mortgage, so you can take $5mm for yourself.

ive heard many times this $5mm is tax free, can anyone explain why?

Comments (6)

Most Helpful
  • Director in RE - Comm
Jan 7, 2022 - 6:48am

Sir, that $5M belongs to the bank - it needs to be paid back with interest - so taxing it would just punish borrowers because that's fundamentally just stealing. If only politicians asked these logical questions... We already tax the crap out of the debt slave cohort (vast majority) of our society... Let's not give the Whiney Warrens any more terrible ideas :)

Jan 10, 2022 - 1:47pm

The statement that this is "tax free" is not entirely accurate. While you will not pay any income tax (as mentioned above) or capital gains tax (obviously) you do have to pay a mortgage recording tax depending on the city / state where the mortgage is being recorded. In NYC, for example, you would pay no mortgage recording tax on the initial $10MM (as the tax would have already been paid during the initial financing) but you would have to pay 2.8% MRT on the additional proceeds of $5MM. 

  • Intern in Consulting
Jan 11, 2022 - 9:16am

Because that 5M isn't something you just "took for yourself"? You have to pay it back? Are you actually an Analyst 1 in CRE lmao

Jan 11, 2022 - 11:41am

Imagine if every homeowner in the US got taxed for 1.) getting a mortgage 2.) refinancing their mortgage (in practice, refinancing is just getting a new mortgage that takes out the existing mortgage) 3.) getting a home equity line of credit…sure, you get taxes from the real estate investors and developers (if part of the funds are going to be used for capex in the existing property, then how the government would even determine what portion of the loan is "cash out equity" would be almost impossible in itself)…but cripple the entire real estate market while you're at it. But if the government is going to essentially be taxing loans, why stop at real estate? Tax student loans, car loans, corporate debt etc…cripple the entire economy

Jan 12, 2022 - 8:20am

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