Aside from providing you with a lower rate, refinancing can allow you to take out additional debt from the equity in your home. You might have extra equity if your home has increased in value or if you've paid down the principal on your mortgage. You do not have to worry about your home refinance cash out taxes, and you might actually get extra tax deductions as a result.
TL;DR (Too Long; Didn't Read)
The cash back that you receive upon refinancing is not taxable because it is part of a loan.
Tax Implications of Refinancing a Mortgage
The cash back that you receive when you do a cash-out refinance on your mortgage is not taxable because it is part of a loan. Loan proceeds do not count as taxable income because they do not increase your net worth. For example, if you take out a $50,000 loan, you have $50,000 more money in your pocket or bank account, but you owe $50,000, so the change in your net worth is zero. Since the cash back you receive as part of the loan is secured by your home, you can deduct the interest on the cash-back portion as home equity debt. This deduction allows you to deduct the interest on up to $100,000 of debt. If you're married but file separately, each spouse can deduct the debt on $50,000 of debt. If you use the cash back to improve your home, it qualifies for the higher mortgage debt interest deduction, but the improvements have to be substantial. For example, replacing a mirror in your bathroom wouldn't count, but completely remodeling a bathroom would.
The debt that you refinanced continues to qualify as mortgage debt, assuming that it was mortgage debt to begin with. This matters, due to the deduction limit for mortgage debt, which is the interest on the first $750,000 of debt – $375,000 if married filing separately – which is 10 times larger than the home equity debt limit. For example, assume you owe $150,000 on your original mortgage and refinance for $200,000, receiving $50,000 back. The $150,000 that you refinanced continues to count as mortgage debt.
When you file your income taxes, you can't deduct either your mortgage interest or your home equity debt interest unless you itemize your deductions. You're also limited to the amount of mortgage debt you can claim, so if you're buying a new house, the 2018 tax law changes will have future cash out refinance tax implications.
2018 Tax Law Changes and Refinancing
The Tax Cuts and Jobs Act suspended the original plan to eliminate your ability to deduct taxes on your home equity loans until 2026. However, if you decide to purchase a new home, you'll only be able to claim interest on $750,000 or less of the home purchase ($375,000 if you're married filing separately).
Claiming on Your 2017 Taxes
To claim any qualifying mortgage interest and home equity debt in either 2017 or 2018, you'll need to file Schedule A along with Form 1040 of your tax return. If you receive a Form 1098 that shows the interest you paid on your refinance, report your deduction on line 10. If you didn't, use line 11, and report the name of the person to whom you paid the interest, along with his Social Security number and address.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."