The cash you receive from a cash-out refinance is not taxable income, because it is borrowed money you are obligated to repay. Whether the interest on your new, larger loan is deductible depends on what you do with the cash, under the rules in IRS Publication 936. Here is how the pieces fit together.
Before we get into details: this article is educational information, not tax advice. Consult a tax professional about your specific situation.
Is the Cash You Receive Taxable?
No. The cash you receive at closing is not taxable income. It is debt, not earnings. You do not report it as income on your tax return, no tax form treats it as earnings, and it does not change your adjusted gross income. The trade you made is a bigger mortgage balance, and the IRS sees exactly that: a loan.
This surprises people who pull six figures out of a home they have owned for a decade. It feels like realizing a gain. It is not. You have not sold anything. You have borrowed against something you still own, and borrowed money is never income.
Is Cash-Out Refinance Interest Tax Deductible?
This is where it gets more nuanced. Deductibility depends on how you use the cash, not on the loan itself.
Cash used to buy, build, or substantially improve the home securing the loan. Interest on that portion can qualify as home acquisition debt under Publication 936, which means it may be deductible if you itemize. Substantial improvements are projects that add value, extend the home's useful life, or adapt it to new uses: an addition, a full remodel, a new roof. Routine repairs and repainting do not make the cut.
Cash used for anything else. Debt consolidation, tuition, a car, a business venture, reserves: interest on that portion is generally not deductible under current law, even though your home secures the whole loan.
The portion that pays off your old balance. This piece generally keeps its old character. If your original loan was acquisition debt (the loan that bought the house), the refinanced balance up to that amount continues to count as acquisition debt.
Here is what the split looks like in practice. Say you take $80,000 in cash at closing: $60,000 pays for a kitchen remodel and $20,000 pays off credit cards. Under the tracing approach in Publication 936, the remodel portion can qualify as home acquisition debt, while the credit card portion cannot. Your tax preparer would treat three quarters of the cash-out amount as potentially deductible debt and one quarter as not, and would allocate the interest accordingly. The paperwork proving which dollars went where is what makes that split hold up.
Concrete scenarios, and how the interest is generally treated under current law:
- All of the cash goes into a major remodel of the home securing the loan. The cash-out portion can qualify as acquisition debt, subject to the overall debt limit.
- All of the cash consolidates credit cards and an auto loan. Interest on the cash-out portion is generally not deductible, even if the consolidation improves your monthly cash flow.
- The cash is split between an addition and college tuition. The addition share can qualify. The tuition share cannot. Tracing and records decide exactly where the line falls.
- The cash sits in savings as a reserve. Money parked in an account is not buying, building, or improving anything, so that interest is generally not deductible.
The same use-of-funds test applies to second liens, so if you are weighing a home equity loan or HELOC instead of a refinance, read are home equity loans tax deductible before assuming either route wins on taxes.
Mortgage Debt Limits
There is a ceiling on how much mortgage debt can generate deductible interest, and a cash-out refinance can push you toward it, because you are deliberately growing your balance.
Under current law, per Publication 936, interest is deductible on up to $750,000 of combined home acquisition debt ($375,000 if married filing separately) for loans taken out after December 15, 2017. Combined means every mortgage on the home counts toward one shared limit.
Older loans get gentler treatment. Mortgages originated on or before December 15, 2017 generally fall under the prior $1 million limit, and refinancing one of those loans generally preserves that grandfathered treatment, but only up to the balance remaining at the time you refinance. Cash you take out beyond the old balance is new debt, tested under the new rules and the current limit. Publication 936 includes worksheets for exactly these mixed situations, and they are worth handing to a professional rather than working alone.
How Does a Cash-Out Refinance Affect Your Tax Return?
For most borrowers, the visible changes on the return itself are small:
- Nothing new to report for the cash. There is no line on your return for "received a cash-out refinance."
- Expect two Forms 1098 in year one. In the year you refinance, your old servicer and your new servicer each send a 1098 for the interest you paid them.
- Your deductible interest may be less than the 1098 total. If part of the cash went to non-qualifying uses, your preparer allocates the interest, and only the qualifying share lands on Schedule A.
- Points get spread out. Discount points paid on a refinance are generally deducted over the life of the loan, a small slice per year.
- Property taxes paid through closing or escrow may count toward your state and local tax deduction, subject to the SALT limits.
- None of it matters unless you itemize. If the standard deduction beats your itemized total, the interest deduction never comes into play.
The tax tail should not wag the dog here. A cash-out refinance needs to make sense on the loan math alone, before any deduction. You can see where the market sits today at /rates and run your own numbers from there.
Points and Closing Costs
Discount points paid on a cash-out refinance are generally deductible over the life of the loan, not all at once. This is the same treatment as any refinance. If you later refinance again or sell, the remaining undeducted points can often be claimed in that year.
Other closing costs (appraisal, title insurance, recording fees, credit report fees) are not deductible. They are costs of borrowing, not interest or taxes.
Record Keeping
If you plan to deduct interest on cash used for home improvements, keep detailed records. Save contracts, invoices, receipts, and bank statements showing loan proceeds flowing to contractors and suppliers, along with your closing disclosure and each year's Form 1098. This documentation is what supports the allocation between deductible and non-deductible interest, and it matters if you are ever audited. Keep it for as long as you own the home, plus the standard IRS retention window after each return that claims the deduction.
Tax rules are complex and they change. I am a mortgage broker, not a tax professional, which is why this article is educational information rather than tax advice: bring your specific numbers to a qualified tax advisor before you file.
FAQ
Do you have to report a cash-out refinance on your taxes?
There is no separate form for the refinance itself, and the cash you receive is not reported as income. The tax return connection comes through the interest: your lender sends Form 1098 showing what you paid, and if some of that interest qualifies for the deduction, you claim it as an itemized deduction on Schedule A.
Can you deduct closing costs on a cash-out refinance?
Mostly no. Appraisal, title, recording, and similar fees are not deductible. Discount points are the main exception, and on a refinance they are generally deducted in small pieces over the life of the loan rather than all at once in the first year.
Does a cash-out refinance change your property taxes?
In most states, no. Refinancing does not trigger a reassessment, because property taxes are based on your home's assessed value, not on your mortgage balance. Your escrow account may change how the bill gets paid, but the bill itself is set by your local assessor.
Rate quotes are estimates based on verified borrower, property, and market details. Actual terms may differ.