Feeling confused about the tax side of a cash-out refi? You’re not alone.

When you tap your home equity through a cash-out refinance, you get access to cash, but you also get new tax considerations. Is the cash taxable? What’s deductible? Can this affect your yearly return?

Don’t worry, we’ve got you.

In this quick but comprehensive guide, we’ll break it down step by step. Whether you're consolidating debt, funding a renovation, or just looking to leverage your equity, understanding the tax impact of a cash-out refinance helps you plan smarter and avoid surprises.

Let’s get into it.

Key Takeaways:

• Cash-out refinance proceeds are typically not taxable, but exceptions exist.
• Interest deductions may change depending on how funds are used.
• Accurate record-keeping is crucial for tax reporting and compliance.
• Consulting a tax professional is highly recommended.

What Is a Cash-Out Refinance, and Why Taxes Matter?

A cash-out refinance replaces your current mortgage with a new one, typically at a higher amount, and gives you the difference in cash. It's popular with homeowners looking to:

• Consolidate high-interest debt
• Pay for home improvements
• Cover tuition or medical bills
  
  

Heads up: Since you're increasing your mortgage balance, this comes with different implications than a traditional refi. Taxes are a big part of that.

Is the Cash You Receive from a Refi Taxable?

Short answer: No. The IRS does not consider the funds from a cash-out refinance as income. Why? Because it’s borrowed money, not earnings.

But there’s a catch.

If your debt is later forgiven (rare in a refi situation) or if you use the cash for investment properties or business purposes, different rules may apply.

What Can You Still Deduct?

You used to be able to deduct all mortgage interest, but that changed with the 2017 Tax Cuts and Jobs Act.

Here’s how it works now:

• Interest is only deductible on up to $750,000 in mortgage debt used to buy, build, or substantially improve your home.
• If you use the cash-out proceeds for a kitchen remodel or a new roof, the interest on that portion may be deductible.
• Use it to pay off credit cards or buy a car? Not deductible.

Pro Tip: Keep receipts and a paper trail. The IRS requires documentation for the deductibility of home-related expenses.

Example Scenarios That May Affect Your Taxes

Scenario 1: You took $60,000 to renovate your basement → Likely deductible.

Scenario 2: You used $30,000 to pay off student loans → Not deductible.

Scenario 3: You pulled equity from a rental property for new HVAC → May have implications under IRS passive income rules. Ask a CPA.

State-Level Tax Considerations

States can differ in how they treat deductions and mortgage interest.

• California: Closely mirrors the federal tax code.
• New York: May have separate rules on home equity deductions.
• Texas & Florida: No state income tax, but local implications (e.g., property tax reassessments) could still matter.

Important: Check with a licensed tax advisor in your state.

Other Costs That May Be Deductible

If itemized, you might be able to deduct:

• Mortgage points paid during the refinance (prorated over the loan life)
• Certain closing costs (check IRS Publication 936)
• Property taxes are paid upfront

Compliance Note: What Borrowers Need to Know?

This content is for educational purposes only and not tax advice. Borrowers should consult licensed professionals for personalized guidance. Mortgage terms and tax implications vary.

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Conclusion: Save Smarter with the Right Tools

A cash-out refinance doesn’t have to mean tax headaches. With the right planning, you can use your equity wisely, maximize deductions, and stay compliant with IRS rules.

Looking for a more cost-effective way to explore homeownership or refinancing?

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FAQs

Is money from a cash-out refinance taxable?

No, it’s considered a loan, not income. However, specific exceptions may apply.

Can I deduct the interest on a cash-out refinance?

Only if the funds are used to buy, build, or improve your primary residence.

Do I need to report a cash-out refinance on my taxes?

Not the cash itself, but interest deductions and certain uses of funds may require documentation.

What if I used the cash for debt consolidation?

You likely can’t deduct interest on that portion of the loan.

How do I know if I qualify for deductions?

Consult IRS Pub 936 and a licensed tax professional to verify your eligibility.

Disclosures:

• Be My Neighbor is a licensed mortgage lender, NMLS #1743790.
• realpha is not a mortgage lender. It offers a commission-free property buying experience and tools.
• This article is informational only and does not constitute financial, legal, or tax advice. Always consult qualified professionals before making decisions.
  
  

For personalized advice or a free equity check, visit Be My Neighbor or explore property tools with realpha.

Make equity work for you, not against you.