How cash-out affects your taxes

The IRS generally doesn't treat loan proceeds as income, because you owe the money back. Taking $50,000 in cash from your equity typically doesn't add $50,000 to your taxable income. The same is true of a home equity loan.

Under current federal rules, mortgage interest is generally deductible only on debt used to buy, build or substantially improve the home that secures the loan, and only if you itemize. Limits apply to the total amount of qualifying mortgage debt.

So the use of the cash matters. If you refinance and use part of the cash to add a bedroom, interest on that part may be deductible. If you use it to pay off credit cards or buy a car, interest on that part generally isn't.

• The part of your new loan that paid off your old mortgage keeps the same treatment the old loan had.
• The part used to buy, build or substantially improve the home may qualify.
• The part used for anything else generally doesn't.

Points you pay on a refinance are usually deducted over the life of the loan, not all in the year you pay them. If part of the loan is used to improve your main home, some of the points may be deductible sooner. If you later sell or pay off the loan, remaining points may be deductible then, with some exceptions.

A cash-out refinance doesn't change your property taxes. Those are based on your home's assessed value and local tax rates, not your loan. Your escrow payment can still change for other reasons, like a new assessment or insurance premium.

If you plan to deduct interest on cash you used for improvements, keep proof.

• Your closing disclosure, showing the loan amount and cash to you.
• Contracts, invoices and receipts for the work.
• Bank records showing the money went to the project.
• Form 1098 from your servicer, showing interest paid.

Tax rules change, and how they apply depends on your income, whether you itemize and how you use the money. A tax professional can tell you what you can deduct before you file.