No, you do not pay taxes on a cash-out refinance. The money your lender hands you at closing is borrowed, not earned, so the IRS does not treat it as income no matter how large the check is. Taxes enter the picture in two other ways: whether you can deduct the interest on your new, larger mortgage, and whether the way you spend the cash raises your home’s cost basis and lowers your capital gains bill when you sell.
Why the Cash Itself Isn’t Taxed
Income, for tax purposes, is money that increases your net worth without an obligation to pay it back. A loan fails that test because every dollar comes attached to a debt. That is why cash-out proceeds never appear on your Form 1040, whether you pulled $30,000 or $200,000, and whether the loan is on your primary or a secondary residence.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction You do not report the proceeds, and you do not owe tax on them at closing.
When You Can Deduct the Interest on the New Loan
The interest you pay going forward is a different question, and the answer turns on two things: how big the mortgage is and what you did with the cash. Rules originally set by the Tax Cuts and Jobs Act of 2017 were made permanent by the One Big Beautiful Bill Act, signed into law on July 4, 2025.
The $750,000 Debt Cap
You can deduct interest only on up to $750,000 in combined mortgage debt across your primary and secondary residences ($375,000 if married filing separately) for loans taken out after December 15, 2017.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction If your existing $500,000 mortgage becomes a $650,000 loan after taking out $150,000, you are still under the cap. Refinance into $850,000 and the interest attributable to the amount above $750,000 is not deductible.
The Use-of-Funds Rule
Even inside the cap, interest on the cash-out portion is deductible only if you used those dollars to buy, build, or substantially improve the home securing the loan.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Spend $50,000 on a new roof and updated electrical, and that interest qualifies. Use the same $50,000 to pay off credit cards, take a vacation, or buy a car, and the interest on that portion is treated as nondeductible personal interest.
Most cash-out refinances mix the two: part of the new loan replaces the old balance (which stays deductible under its own rules), and part goes to the borrower for whatever purpose. You have to prorate. On a $400,000 loan where $320,000 replaced the old mortgage and $80,000 went to personal expenses, only 80% of the year’s interest is deductible. Your lender’s Form 1098 shows total interest paid, but calculating the deductible share is on you.2Internal Revenue Service. Form 1098 Bank statements, contractor invoices, and receipts are what will back up your numbers if the IRS asks.
Whether the Deduction Actually Helps You
Mortgage interest is an itemized deduction. It only reduces your tax bill if your total itemized deductions beat the standard deduction. For tax year 2026, the standard deduction is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A married couple paying $8,000 a year in mortgage interest would need more than $24,200 in other itemized deductions (state and local taxes, charitable gifts, and so on) before the mortgage interest starts producing any real tax savings. Running that math before refinancing keeps you from overestimating what the deduction is worth to you.
Points and Closing Costs
Points you pay at closing on a refinance generally have to be deducted evenly over the life of the new loan, not all in the first year.1Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction Pay $3,000 in points on a 30-year refinance and you deduct $100 a year.
Two exceptions matter. If part of the refinance went to substantially improve the home, the share of points tied to that improvement portion can be deducted in the year you paid them. And if you refinance again or pay the loan off early, any unamortized points from the previous refinance become deductible in that year.4Internal Revenue Service. Topic No. 504, Home Mortgage Points
Other closing costs on a personal residence refinance — appraisal fees, title insurance, attorney fees, recording fees — are not deductible at all. They are costs of getting the loan, not interest.
How Spending the Cash Affects Your Tax Bill When You Sell
Your home’s cost basis is what the IRS uses to figure your taxable profit at sale. Basis starts with what you paid for the property and rises when you make qualifying capital improvements. Taking cash out does nothing to basis on its own. Spending that cash on qualifying work does.
Qualifying improvements are projects that add value, extend the home’s useful life, or adapt it to a new use: additions like a bedroom or deck, major system upgrades such as central air or new wiring, exterior work like roofing or siding, kitchen and bath renovations, and grounds work like driveways or a pool. Routine repairs and maintenance do not count, unless the repair is folded into a larger renovation. Replacing one cracked window is a repair; replacing every window in the house is an improvement.5Internal Revenue Service. Publication 523, Selling Your Home
Basis matters because Section 121 lets you exclude up to $250,000 of gain on the sale of your primary residence, or $500,000 for married couples filing jointly, as long as you owned and lived in the home for at least two of the five years before the sale.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence Above the exclusion, every dollar you added to basis through documented improvements is a dollar of gain you don’t pay tax on. Keep the receipts and invoices from any refinance-funded work. You may need them years later.
Rental and Investment Properties Follow Different Rules
If the property you’re refinancing is a rental rather than your personal residence, the framework changes. Interest is a business expense reported on Schedule E against rental income, not an itemized deduction, and the $750,000 cap does not apply. Points are still generally deducted over the life of the loan, but under accounting rules specific to rental property. Other closing costs are usually capitalized and recovered through depreciation rather than deducted right away.7Internal Revenue Service. Publication 527, Residential Rental Property If cash-out proceeds from a rental refinance go somewhere other than back into the rental, the points tied to those proceeds generally cannot be deducted as a rental expense. The tax treatment is more favorable in some respects and more complicated in others, and the bookkeeping needs to be tight.