What are the tax benefits of cash-out refinancing?

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.