A Guide To The Tax Implications Of A Cash-Out Refinance
Author:
Victoria ArajMay 17, 2024
•7-minute read
If you’re planning a major home upgrade and want to use your home equity to your advantage, you might wonder about cash-out refinance tax implications. Many homeowners use this type of refinance to cover some expensive debt, like adding a pool or replacing a broken HVAC unit.
We’ll discuss some of the implications you might consider when you file your taxes during the year in which you take a cash-out refinance. We’ll also give you a refresher on how these refinances work and how much they cost so you can understand how the IRS views the money you receive.
Overview: Tax Implications With Refinances
You accept a loan with a higher principal and take out the difference in cash when you take a cash-out refinance. The IRS views refinances a bit differently than they do a first mortgage. In other words, the IRS sees refinances as a type of debt restructuring. This means that the deductions and credits you can claim with a refinance are less robust than when you originally took out your loan.
The Tax Cuts and Jobs Act of 2017 increased the standard deduction for both single and married filers but also cut many tax deductions homeowners could previously count on.
Under this tax law, your insurance payments aren’t considered tax deductible. Some new rules also apply to refinances. For example, you can’t deduct the total cost of any discount points you pay at closing in the year you get your new loan (above the $10,000 max property and state tax deduction). However, you may deduct them over the course of your new loan.