Tax Implications of Refinancing a Mortgage: Interest, Points, Cash-Out

The tax implications of refinancing a mortgage come down to four things: how much of the interest you can still deduct, how points on the new loan get written off, whether any cash you pulled out qualifies for the mortgage interest deduction, and what happens to the closing costs. Refinancing itself doesn’t create taxable income, and the cash from a cash-out refinance isn’t income either.¹ What changes is the math on your Schedule A, and a few traps can quietly cost you money if you don’t know they exist.

How Much Mortgage Interest You Can Still Deduct

The deduction limit depends on the date of your original mortgage, not the date you refinanced. Loans first taken out on or before December 15, 2017 keep the older $1 million acquisition debt cap ($500,000 if married filing separately). Loans originated after that date are capped at $750,000 ($375,000 if married filing separately).² The One Big Beautiful Bill Act made the lower cap permanent in 2025.³

Refinancing preserves the grandfathered $1 million status, but only up to the principal balance that was outstanding on your old mortgage at the moment of the refinance. The statute treats refinanced debt as acquisition indebtedness “only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.”² Anything you borrowed above that old balance is treated as new debt under the $750,000 cap, unless you used the extra funds to substantially improve the home.

Two documents settle this: the payoff statement from your old lender showing the exact principal retired, and the closing disclosure from the new lender showing the amount financed. The IRS has no way to know which portion of your new loan qualifies for the higher grandfathered limit, so the burden of proof is on you.

Does the Deduction Even Help You?

None of this matters if you take the standard deduction. For 2026, the standard deduction is $32,200 for married filing jointly, $16,100 for single filers or married filing separately, and $24,150 for head of household.⁴ Most taxpayers take the standard deduction because their itemized total falls short. Add up your projected mortgage interest, state and local taxes, and other itemized deductions before you count on tax savings from a refinance. If the total sits below your standard deduction, the refinance won’t move your tax return at all.

Points on the New Loan Get Spread Over Its Life

Points paid to buy a home can often be deducted in the year paid. Points paid to refinance almost always cannot. Federal law treats prepaid interest that covers future tax years as deductible over the life of the loan.⁵ On a 30-year refinance with $3,000 in points, you deduct one-thirtieth per year. On a 15-year refinance, roughly $200 per year.⁶

One exception is worth knowing. If part of the refinance funded a substantial improvement to your primary home, the proportional share of points tied to that improvement is fully deductible in the year paid. Refinance $100,000 and put $25,000 into a kitchen renovation, and 25% of the points qualify for an immediate deduction; the other 75% gets amortized.⁶ Keep contractor invoices and receipts to support the allocation.

Leftover Points From the Old Loan

If you were amortizing points from a prior mortgage, the unamortized balance is generally deductible in full in the year that loan is paid off through the refinance. Six thousand dollars in points on a 30-year loan, five years of $200 deductions taken, and $5,000 remains: that $5,000 can come off in the year you refinance.⁶

There’s a catch that surprises people. If you refinance with the same lender, you cannot take the lump-sum deduction. The unamortized balance from the old loan is instead added to the points on the new loan and spread over the new term.⁶ Many homeowners refinance with their current servicer for convenience and lose a one-time deduction without realizing it. If your unamortized balance is meaningful, get a quote from a different lender before deciding.

Cash-Out Proceeds Are Not Taxable Income

A cash-out refinance hands you a lump sum, but that money is not income. Borrowed funds carry an equal obligation to repay, so the IRS doesn’t tax them as gross income.¹ You owe nothing at closing on the cash itself.

The real tax question is whether interest on that extra debt is deductible. If you used the cash to improve your qualified residence (a renovation, an addition, a new roof), the interest qualifies as acquisition debt and remains deductible under the applicable cap.² If you used it to pay off credit cards, buy a car, or cover tuition, the interest is generally not deductible as mortgage interest. The debt is still secured by your home, but security alone doesn’t make interest deductible under current law. What you did with the money is what matters.

When Cash-Out Funds Serve Multiple Purposes

If you split the proceeds — say, $40,000 into a home addition, $20,000 to credit cards, $15,000 into investments — federal regulations require you to trace where the borrowed money actually went and allocate the interest accordingly.⁷ Interest follows the expenditure, not the collateral. If you deposit the proceeds into a bank account, expenditures made within 15 days can be treated as coming from the loan proceeds even if the account already held other money.

The practical move is to spend cash-out funds on their intended purpose quickly and keep the paper trail clean. Depositing proceeds into an everyday spending account muddies the tracing and tends to produce the worst allocation for you. A separate account used only for the proceeds and the improvement expenses is the simplest path.

Closing Costs You Generally Can’t Deduct

Appraisal fees, title insurance, credit report charges, recording fees, loan origination charges, and other administrative costs paid to close a refinance are not deductible. The IRS classifies them as costs of obtaining a loan.⁸ They also generally can’t be added to your home’s cost basis. Publication 523 specifically lists “fees for refinancing a mortgage” among the settlement costs excluded from basis, along with appraisal fees, credit report costs, and loan origination charges.⁹ The only piece of the closing package that gets deductible treatment is points, and those are amortized.

Hold onto the closing disclosure anyway. You need it to confirm the point amount, to separate deductible items from non-deductible ones, and to reconstruct what portion of your new loan qualifies as acquisition debt if any costs were rolled into the balance.

Rental and Investment Property Is a Different System

Everything above is for your primary or second home. Refinancing a rental follows a different regime. Mortgage interest on a rental is a business expense reported on Schedule E, not an itemized deduction on Schedule A, and the $750,000 acquisition debt cap doesn’t apply.⁶ Points on a rental refinance are amortized as a business expense. Some non-deductible closing costs may be capitalized and depreciated. If you’re refinancing an investment property, work from Publication 527, not the personal-residence rules.

How to Report a Refinance on Your Tax Return

Start with Form 1098. You should get one from every lender that held your mortgage during the year, which after a refinance usually means two. Box 1 shows the mortgage interest that lender received.¹⁰ Add the Box 1 amounts to get your total interest paid for the year.

Box 6 reports points paid on the purchase of a principal residence.¹⁰ Points paid on a refinance do not appear there. You’ll pull those from your closing disclosure and calculate the annual amortized share yourself. Any leftover unamortized points from the old loan won’t show up on a 1098 either; that figure comes from your own records of prior deductions.

Everything is reported on Schedule A if you itemize.¹¹ Combine the interest from both 1098s on the mortgage interest line and add the calculated points deduction. Make sure the interest total matches what the lenders reported to the IRS. Mismatches generate automated notices.

Keep the closing disclosure, both 1098 forms, contractor invoices for any improvements, and records showing where the cash-out proceeds went. The IRS requires records supporting deductions for at least three years from the filing date.¹² For refinancing records, hold them longer. You may need to prove your original loan date and balance years later when you refinance again or sell the home.

1
Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Congress.gov. H.R.1 – 119th Congress (2025-2026)
4
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
5
Office of the Law Revision Counsel. 26 USC 461 – General Rule for Taxable Year of Deduction
6
Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
7
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary)
8
Internal Revenue Service. Publication 551 – Basis of Assets
9
Internal Revenue Service. Publication 523 – Selling Your Home
10
Internal Revenue Service. Instructions for Form 1098 (12/2026)
11
Internal Revenue Service. Instructions for Schedule A (Form 1040)
12
Internal Revenue Service. How Long Should I Keep Records