@King-55 wrote:
I believe it does not since the loan has no relations to the cost. It served as a means of buying your home.
However if you used the HELOC to make upgrades to the property they would be added to the orig. cost of the property & reduce your tax liability.
The loan balance has nothing to do with your capital gains. If you used part of the loan to make improvements, the improvements add to your cost basis and will reduce your gains, but that is true of all improvements, no matter how you pay for them. The existence of a loan does not affect your capital gains in any way. Paying off any kind of home loan makes no difference to your capital gains either.
Your capital gain is the difference between the adjusted cost basis and the selling price. Allowable adjustments to the cost basis are listed in publication 523 and include improvements, as well as certain closing costs.
https://www.irs.gov/pub/irs-pdf/p523.pdf
Suppose you buy a home for $200,000 and sell it for $800,000, and you made $100,000 of improvements. Your adjusted basis is $300,000 and your selling price is $800,000 so your gain is $500,000.
Now, suppose you have your original mortgage that is paid off down to $150,000 and you have an HELOC of $200,000 that was used partly for the improvements and partly for other things. You will get $450,000 of cash proceeds, but your capital gain is still $500,000. Or, suppose you paid off the first mortgage and your only loan is the HELOC. Your cash proceeds will be $600,000, but your capital gains is still $500,000. Or, suppose you borrowed $600,000 in equity debt and used it for fast living. You will only get $50,000 in cash proceeds, but your capital gain is still $500,000, and you might owe more in taxes than your cash proceeds. But remember you paid no tax on the $600,000 cash out refinance, which was just a way of cashing out the capital gains early. Capital gains aren't taxed until they are realized by making them real (by selling the property for a certain price, since otherwise prices can go up or down and until you realize the gain, it's only potentially a gain). But you pay tax on your gain, not your cash proceeds.
