How a Cash-Out Refinance Affects Your Taxes: 2025 Homeowner Guide | reAlpha Mortgage

Feeling confused about the tax side of a cash-out refi? You’re not alone.

When you tap your home equity through a cash-out refinance, you get access to cash, but you also get new tax considerations. Is the cash taxable? What’s deductible? Can this affect your yearly return?

Don’t worry, we’ve got you.

In this quick but comprehensive guide, we’ll break it down step by step. Whether you're consolidating debt, funding a renovation, or just looking to leverage your equity, understanding the tax impact of a cash-out refinance helps you plan smarter and avoid surprises.

Let’s get into it.

• Cash-out refinance proceeds are typically not taxable, but exceptions exist.
• Interest deductions may change depending on how funds are used.
• Accurate record-keeping is crucial for tax reporting and compliance.
• Consulting a tax professional is highly recommended.

A cash-out refinance replaces your current mortgage with a new one, typically at a higher amount, and gives you the difference in cash. It's popular with homeowners looking to:

• Consolidate high-interest debt
• Pay for home improvements
• Cover tuition or medical bills

Heads up: Since you're increasing your mortgage balance, this comes with different implications than a traditional refi. Taxes are a big part of that.

Short answer: No. The IRS does not consider the funds from a cash-out refinance as income. Why? Because it’s borrowed money, not earnings.

But there’s a catch.

If your debt is later forgiven (rare in a refi situation) or if you use the cash for investment properties or business purposes, different rules may apply.

You used to be able to deduct all mortgage interest, but that changed with the 2017 Tax Cuts and Jobs Act.

Here’s how it works now:

• Interest is only deductible on up to $750,000 in mortgage debt used to buy, build, or substantially improve your home.
• If you use the cash-out proceeds for a kitchen remodel or a new roof, the interest on that portion may be deductible.
• Use it to pay off credit cards or buy a car? Not deductible.

Pro Tip: Keep receipts and a paper trail. The IRS requires documentation for the deductibility of home-related expenses.

• Scenario 1: You took $60,000 to renovate your basement → Likely deductible.
• Scenario 2: You used $30,000 to pay off student loans → Not deductible.
• Scenario 3: You pulled equity from a rental property for new HVAC → May have implications under IRS passive income rules. Ask a CPA.

States can differ in how they treat deductions and mortgage interest.

• California: Closely mirrors the federal tax code.
• New York: May have separate rules on home equity deductions.
• Texas & Florida: No state income tax, but local implications (e.g., property tax reassessments) could still matter.

Important: Check with a licensed tax advisor in your state.

If itemized, you might be able to deduct:

• Mortgage points paid during the refinance (prorated over the loan life)
• Certain closing costs (check IRS Publication 936)
• Property taxes are paid upfront

Find the Perfect Mortgage for Your Dream Home with reAlpha Mortgage.

Compare options, calculate payments, and get expert guidance - all in one place.

Check if you qualify

This content is for educational purposes only and not tax advice. Borrowers should consult licensed professionals for personalized guidance. Mortgage terms and tax implications vary.

reAlpha Mortgage | NMLS #1743790

Buying or refinancing shouldn’t drain your savings - it should build them. At reAlpha Mortgage, you can save thousands at closing with up to 75% of your buyer agent’s commission back.

Start with 25% just by using a reAlpha agent. Add your mortgage through reAlpha Mortgage to increase it to 50%. Bundle in title services and unlock the full 75% rebate.

That’s real money you can use for closing costs, renovations, or moving day must-haves.

Make your next move smarter. See how much you could save at reAlpha Mortgage.

No, it’s considered a loan, not income. However, specific exceptions may apply.

Only if the funds are used to buy, build, or improve your primary residence.

Not the cash itself, but interest deductions and certain uses of funds may require documentation.

You likely can’t deduct interest on that portion of the loan.

Consult IRS Pub 936 and a licensed tax professional to verify your eligibility.

• reAlpha Mortgage is a licensed mortgage lender, NMLS #1743790.
• reAlpha is not a mortgage lender. It’s a homebuying platform that helps you earn up to 75% of your buyer agent’s commission back — real cash toward your closing costs, upgrades, or moving expenses.
• This article is informational only and does not constitute financial, legal, or tax advice. Always consult qualified professionals before making decisions.

For personalized advice or a free equity check, connect with reAlpha Mortgage or explore smarter buying tools at reAlpha.

Make equity work for you, not against you.

Find the Perfect Mortgage for Your Dream Home with reAlpha Mortgage.

Compare options, calculate payments, and get expert guidance - all in one place.

Check if you qualify