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What are the tax benefits of cash-out refinancing?

Author: Jessica Bennet
Community Mentor
Ask Jessica
Posted on: 01st Aug, 2005 10:19pm
When the rate of interest declines, it becomes profitable for the borrowers to refinance. However, before plunging into refinancing, it is important to know its tax implications. This helps you in proper tax planning. Tax deductions on refinancing depend on the refinance loan proceeds and how these proceeds are used. There are two cases.

Home acquisition loans

If you use the cash out refinance proceeds for improving the principal residence or for a second home, then it comes under home acquisition loans. The interest payments that you make for this loan are tax-deductible. This deduction is available up to a loan limit of $1000000 for an individual. For married couples filing separate returns, this limit is $500,000.

Consumer loans

If the loan proceeds are used for purposes other than home related matters, then these come under consumer loans. These may include auto loans, credit card bills, personal debts, medical expenses. Interest paid on the loan used for these purposes is not tax deductible.
Posted on: 01st Aug, 2005 10:19 pm
is the cash obtained from refinance taxable?
Hi Sara
Welcome to MortgageFit forum.

Whether the cash obtained from refinancing is taxable or not depends on whether the refinance has occurred before or after any exchange of property. If the pre-exchange refinance is executed as a part of exchange transaction, the cash received will be treated as cash ("boot") received by disposing the relinquished property. Hence the cash is regarded as taxable income.

But if refinancing occurs after the property exchange when he has been given the title of ownership of the property, the cash obtained is not treated as taxable income.

The major difference between pre and post-exchange refinancing lies in the repayment of debts. In a pre-exchange refinancing, a tax payer is free from the obligation upon the transfer of the relinquished property. But in a post-exchange refinancing, the tax payer is required to pay off the debt.

Hope you will be benefited from this information.

Please feel free to write back with further queries.

Posted on: 01st Aug, 2005 11:10 pm
will I get any tax benefit if go for cash out refinance?
Posted on: 03rd Aug, 2005 10:57 pm
Hi Jackson

When you opt for a cash-out refinance, you avail more cash than your unpaid mortgage balance. This additional amount is considered as taxable income and you are likely to pay taxes for it. With this amount you can pay off other debts on which the interest is not deductible.

Generally an individual is allowed to borrow up to $100,000 from their primary residence along with the first mortgage and then deduct the interest charged before it is repaid. The Internal Revenue Service provides you with more information on this subject through IRS Publication 936 Home Mortgage Deduction.

Wish to receive your feedback.

Posted on: 03rd Aug, 2005 11:20 pm
I am currently considering refinancing my $240,000 mortgage for a $180,000 mortgage. The gentleman who is helping me with my refinance told me that we may be able to get my current lender to accept a settlement amount of $180,000 on my $240,000 mortgage. My payment history with them is excellent, I am only trying to lower my interest rate. My question is this...what effect does the $60,000 "written off" by my current lender have on my taxes? Will it be considered as income for me? I don't want to do this deal if it's going to mean owing the IRS next April.
Posted on: 30th Apr, 2009 10:10 am
traci, the lender in question is probably going to issue to you a 1099 form and that $60k will appear as taxable income. you'd better speak with a tax advisor, or the irs directly, and also ask the bank its intentions as to whether they'll be issuing the 1099.

sara...i have never heard of anyone claiming proceeds from a cash-out refinance as income. that's not to say it doesn't happen, of course.

also, it looks like you were addressing 1031 exchanges in your post - now close to 4 years ago. i'm just curious if that's what you were discussing. i didn't get that reference from the original post.
Posted on: 30th Apr, 2009 10:19 am
I hate to ask an reoccuring question, but I need to know....I have been in my existing primary residence for approx. 7 years. I want to refinance my existing mortgage and cash out $130,000. My new mortgate would be at a lower interest rate and I am doing this with my same mortgage company. Would I need to pay taxes on the $130K cash out money? Does it matter what I would be using the $130K cash for? I appreciate your response.
Posted on: 08th Oct, 2009 06:57 am
Contact a tax adviser and he would be the best person to let you know whether or not you will have to pay taxes.
Posted on: 08th Oct, 2009 11:58 pm
michael d - consulting a tax advisor is a good idea in any case, but what you are talking about is borrowed money, which you are obligated to pay back.

not only have i never heard of anyone being required to pay taxes on borrowed money, i think it would be a pretty doggone creepy way for government to fix budget issues. in my reasonably well-informed opinion, it is absolutely not taxable. keep in mind i am not a tax advisor.
Posted on: 11th Oct, 2009 09:18 pm
I refinanced my home and recieved 73,000 back. Do I have to pay federal taxes on this income.
Posted on: 09th Dec, 2009 10:50 am
Hi Rochelle!

Welcome to forums!

As far as I know, the money you received from refinancing will not be considered as your income. So you won't have to pay any taxes on it.

Feel free to ask if you've further queries.

Posted on: 10th Dec, 2009 12:28 am
a definitive no, rochelle. you do not have to pay income tax on proceeds from a loan.
Posted on: 10th Dec, 2009 08:37 am
I got balance transfer loans from various credit cards companies to purchase my dream home and paid home in full. If i get home equity on this house, the home equity will be taxable income?
Posted on: 22nd Sep, 2010 06:43 pm
Welcome singh,

As far as I know, the interest on most of the home equity loans are tax deductible. However, there are limitations to interest deductions for home equity loans depending on what the loan is used for.
Posted on: 23rd Sep, 2010 12:05 am
I am refinancing my mortgage of $241,000 to get my partner as a co-owner on the mortgage. The property assessed at $345K. Our new loan will be $275K so that I can get $25K out in cash to pay other debt. Would that cash out be taxable for me?
Posted on: 04th Oct, 2010 07:59 am
Hi Guest!

Welcome to forums!

The cash out amount will not be considered as a taxable amount. It is not your income. Though you take a cash out, you will be paying it off to the lender.

Feel free to ask if you've further queries.

Posted on: 05th Oct, 2010 01:39 am
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