Is a cash-out refinance considered taxable income?

No. The cash you receive is a loan, not income. You're borrowing against equity you already own, so the IRS doesn't count it as taxable income. No 1099 is issued, and no capital gains tax applies at the time of the refinance.

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

Only on the portion of the loan used to buy, build, or substantially improve your home. If you cash out $80,000 and use it all for a renovation, the full interest is deductible. If you use it to pay off debt, that portion's interest is not deductible.

Does a cash-out refinance reset my mortgage interest deduction limit?

Yes, if you had a pre-2018 loan with the $1 million debt limit, refinancing generally resets the clock to the current $750,000 limit — unless you're only refinancing the remaining principal (no cash out).

Are mortgage points on a cash-out refinance tax deductible?

Yes, but they must be deducted over the life of the loan — not in full the year you pay them. On a 30-year loan, $6,000 in points means $200 per year. If you refinance or sell before the loan ends, you can deduct the remaining balance in that final year.

What are the tax rules for cash-out refinancing a rental property?

Different rules apply. On a rental property, the interest is deductible as a business expense regardless of how you use the cash-out proceeds. The home improvement restriction only applies to primary and secondary residences.

Cash-Out Refinance: The Tax Side Nobody Explains

Let's start with the good news: the cash you receive from a cash-out refinance is not taxable income. You're not earning money — you're borrowing against equity you already own. The IRS doesn't count a loan as income.

But that's only part of the story. The real tax question isn't about the cash itself — it's about what happens to your mortgage interest deduction, and what you do with the money.

How a Cash-Out Refi Changes Your Interest Deduction

When you do a cash-out refinance, your new loan balance is higher than your old one. That larger balance means more interest — but not all of that interest is necessarily deductible.

The rule (from IRS Publication 936): the additional debt created by the cash-out portion is only deductible if you used that money to buy, build, or substantially improve your home.

Example: You owe $300,000 on your mortgage. You do a cash-out refi and take out $380,000, pocketing $80,000. If you use that $80,000 to renovate your kitchen, the interest on the full $380,000 is deductible (assuming you're under the $750,000 total debt limit). If you use it to pay off credit cards, only the interest on the original $300,000 is deductible.

The $750,000 Debt Limit Still Applies

After a cash-out refi, your new loan balance must stay under $750,000 for the interest to be fully deductible. If you cross that threshold, you can only deduct interest on the first $750,000 of debt.

If you had a loan before December 15, 2017, you may be operating under the old $1 million limit — but refinancing resets the clock. One exception: if you refinance only the original principal balance (no cash out), you can keep the old limit.

When the Cash Is Spent on Home Improvement

This is the cleanest scenario. You put the money back into the house — new addition, kitchen gut, HVAC replacement. The IRS treats that as acquisition debt, the interest is deductible, and you also increase your cost basis in the home. That higher basis can reduce your capital gains when you eventually sell.

Keep your contractor invoices and permits. You'll want documentation if the IRS ever questions whether the work qualifies as a substantial improvement.

When the Cash Goes Somewhere Else

Using cash-out refi proceeds for anything other than home improvement — paying off debt, investing, funding a business, education — means the interest on that portion is not deductible. The popular advice to "use home equity to pay off high-interest debt" is financially sound in some cases, but the tax benefit people assume exists often doesn't.

Discount Points and Closing Costs

Unlike a purchase mortgage, where you can deduct points in full in the year paid, refinance points must be deducted over the life of the loan. If you paid 1.5 points on a $400,000 refi ($6,000 in points) on a 30-year loan, you deduct $200 per year. If you pay off or refinance again before the loan ends, you can deduct the remaining points in that final year.

What About Investment Properties?

Different rules apply. If you cash-out refinance a rental property, the interest is deductible as a business expense regardless of what you do with the money — because investment property debt is treated differently under the tax code. The residential use restriction only applies to personal residences.

The Practical Takeaway

If you're planning a cash-out refi, ask yourself two questions before you close: What am I using the money for? And does my new loan balance stay under $750,000? The answers determine how much of your interest you'll be able to deduct going forward — and over 15 to 30 years, that difference compounds significantly.