Cash-Out Refinance Tax Implications
A cash-out refinance has specific tax considerations that differ from a standard rate-and-term refinance. Here is what you should know.
Is the Cash You Receive Taxable?
No. The cash you receive from a cash-out refinance is not taxable income. It is borrowed money, not earnings. You do not need to report it as income on your tax return.
Interest Deductibility
This is where it gets more nuanced. The deductibility of mortgage interest on a cash-out refinance depends on how you use the cash.
Cash used for home improvements. If you use the cash-out funds to buy, build, or substantially improve your home, the interest on that additional amount may be deductible (subject to overall mortgage debt limits).
Cash used for other purposes. If you use the cash for debt consolidation, education, or other non-home purposes, the interest on the cash-out portion is generally NOT deductible.
Mortgage Debt Limits
There are limits on how much mortgage debt qualifies for the interest deduction. These limits depend on when you originally took out the mortgage. Under current tax law, mortgage interest is deductible on up to a certain amount of acquisition debt (debt used to buy, build, or improve your home).
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 as any refinance.
Other closing costs (appraisal, title insurance, etc.) are not deductible.
Record Keeping
If you plan to deduct interest on cash used for home improvements, keep detailed records. Save receipts, contracts, and invoices that show the funds were used for qualifying improvements. This documentation matters if you are ever audited.
Important Reminder
Tax rules are complex and change frequently. I am a mortgage broker, not a tax professional. Always consult a qualified tax advisor about your specific situation.
The financial benefits of a cash-out refinance should stand on their own, even before tax considerations. Check your rate at Lendtrain to see if the numbers work.
Rate quotes are estimates based on the credit score you enter. Actual rates may differ based on verified credit, income, and property details. Lendtrain (NMLS# 1844873) is a licensed mortgage broker. Equal Housing Opportunity.