Loans have nothing to do with cost basis. Your starting basis is $500. Then, you can include the cost of permanent improvements, and you must subtract depreciation you claimed or could have claimed.
Let's go way from a rental and look at a simple investment. You buy for $500 and sell for $1000. You have a $500 capital gain. Suppose you paid all cash, and get $1000 of proceeds. Your gain is $500. Suppose you paid $100 down and $400 loan, therefore you only get $500 proceeds after selling. Your gain is still $500. Suppose you refinanced (borrowed) an additional $500, so your loan was $900. You still have a capital gains of $500, the difference is just that you took some of the proceeds early as part of the loan.
