I bought an investment property in the United States for $20k in 2005, got a $100k refi loan on it in 2007 and sold the property for $100k in 2018. When I sold the property in 2018, I owed about $80k on the principal from the refi loan.

Because I bought the property for $20k and sold it for $100k, my accountant says that the IRS considers this a capital gain of $80k, and that I'll have to pay taxes on that amount for 2018. However, because the mortgage principal was $80k at the time I sold, the amount of money I have in my pocket after the property sale is very small (the $20k difference between the loan balance and the sales price, minus Realtors' fees, repairs, etc. associated with the sale).

I'd like to avoid paying taxes on an extra $80k worth of income for 2018. One idea is to put as much money as possible into a retirement account. It wouldn't offset the whole tax liability because of retirement contribution limits, but it would help.

I know I could also offset property gains taxes from a real estate sale by reinvesting them in other real estate. That could also help, although I don't have $80k to invest, so I can't offset the entire tax liability this way.

Any other ideas?

  • 1
    Did you use the loan to improve the property?
    – Hart CO
    Commented Dec 3, 2018 at 20:11
  • @HartCO I used part of it for that purpose but not all. Commented Dec 3, 2018 at 20:50
  • 2
    Additional amounts that you invested to improve the property should have increased your basis in the property from $20k to $20k + investment. That decreases the amount of the sales price that is a capital gain. That seems like a relatively obvious thing for an accountant to ask about, though, which confuses me. Commented Dec 3, 2018 at 21:01
  • Also what was the depreciation during the 13 years of ownership. This would have to be recaptured. Commented Dec 3, 2018 at 21:22
  • At the time I made the improvements the property was my primary residence. It became a rental only about five years ago. Also, I made most of the improvements myself, so the cost was low. Commented Dec 4, 2018 at 13:15

2 Answers 2


Had you not taken the loan, would you have made an $80k profit on the property ?
Had you not had the house and taken a hypothetical unsecured $100k loan that you still owe $80k on, would that change your tax burden ?

Clearly you've made $80k profit and clearly you need to pay the taxes on it. Now you could offset the profit by whatever you paid for improvements on the house (I'm not entirely sure on the tax details).


I always wonder when people refer to an accountant or tax preparer, but that professional either doesn’t offer a full explanation or know the full rules of what they should.

During the time you owned this property, you were required to depreciate it. Your basis dropped over that time. You say you had improvements. You should have kept records of them and added them to the cost of the property, and of course started to depreciate that as well.

The gain is the difference between the adjusted cost and sales price after the expense of sales. That gain is not ordinary income and cannot be used to fund a retirement account. (Of course if you have earned income, you now have some cash you can use to fund your IRA. Even then, the limit is pretty low.)

Loans don’t come into the equation as you might hope. You got the $80K profit already. In cash. You didn’t pay any tax in that $80K. Now, on the sale, that tax comes due. Hopefully, you benefited over the years with some tax write-off each year as well.

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