If I take a loan against an asset, like a house or stocks, do I end up with a tax bill? What if the lender accepts the asset as payment instead? Is there a legal way around paying extra tax?
What do you mean?
Basically, if you hand over an asset like a house as part of the loan deal, it’s usually treated like a sale. If it’s your main home, there might be some tax exclusions if you lived there long enough.
Yeah, it’s like selling the asset to pay the debt. If you took a $100k loan against stocks and the lender took the stocks as payment, you technically ‘sold’ those stocks for $100k. If you bought them for $10k, you’d be taxed on a $90k gain. Houses work a bit differently if it’s your primary residence since there’s a tax threshold.
Debt forgiveness can end up being taxable.
There’s a few points to think about here.
Let’s say you have a $100k loan; normally, you pay that back, plus interest, and there’s no tax involved.
If you hand over an asset worth more than the loan, you’re fine, though not ideal. If it’s equal to the loan amount, it’s all good. But if the asset’s worth is less than the loan amount, the difference might be considered income and could be taxable.
If your total debt is higher than all your assets combined, you might not have to pay tax on the forgiven part. But you’d need more details for an accurate answer.
@Kerr
Yeah, but you’d still owe tax on any gain from the asset. It’s as if you sold it and paid with the money. So if you’re trying to avoid that, this approach won’t work.
Caden said:
@Kerr
Yeah, but you’d still owe tax on any gain from the asset. It’s as if you sold it and paid with the money. So if you’re trying to avoid that, this approach won’t work.
Yep, people often forget this. Without that step, it’d be a big tax loophole. Got some old stock that’s gone way up? Just borrow against it, hand it over, and no tax! But it doesn’t work that way; the IRS isn’t clueless about these things.
If they take the asset instead of cash, they aren’t forgiving the loan, so you don’t have cancellation-of-debt income.
But if the asset is worth less than what you owe, the rest of the debt might be forgiven.
If they take something more valuable, like your house, they’d sell it, and you’d keep anything left after paying off the loan.
@Vance
Wait, that’s not how it works. If there’s a gain, you’re taxed as if the asset was sold, and the loan was paid with the proceeds.
You can’t avoid the tax on canceled debt.
Ash said:
You can’t avoid the tax on canceled debt.
Well, technically, they didn’t cancel it; they just took payment.
Loans aren’t taxed. But if you don’t pay, you’ll face the consequences. None of this helps with taxes unless you’re trying to claim a deduction on interest from a home or student loan.
For business assets held over a year, there’s usually depreciation.
Bottom line: talk to a tax professional. It’ll save you trouble in the long run.