Tax Implications of a Cash-Out Refinance

A cash-out refinance can provide a significant influx of capital, but it also changes your relationship with the IRS. In 2026, with the One Big Beautiful Bill (OBBB) making several tax provisions permanent, understanding how the code treats your new loan balance is essential. While the cash you receive isn’t “income,” the interest you pay is subject to strict “tracing” rules.For a foundational look at this loan, see our Complete Guide to Cash-Out Refinancing.

Is the Cash from a Refinance Taxable in 2026?

The short answer is no. The IRS does not consider the money you receive from a cash-out refinance as earned income. Because the funds are part of a loan that you are contractually obligated to repay, the cash received at the closing table is considered a debt restructuring, not a financial gain.

Whether you use the funds for home improvements or debt consolidation, you do not report the lump sum as income. However, the interest you pay on that cash is where the tax impact truly lies.

The “Buy, Build, or Improve” Rule

Under 2026 tax laws, you can only deduct the interest on the “cash-out” portion of your loan if the funds are used to buy, build, or substantially improve the home that secures the loan.

Deductible Uses

Kitchen or bathroom remodels.
Replacing a roof or windows.
Upgrading HVAC or plumbing.
Adding a deck or room addition.

Non-Deductible Uses

Paying off credit card debt.
Consolidating student loans.
Purchasing a vehicle.
Investing in the stock market.

If you are exploring these options, visit our guide on the top Reasons to Refinance to weigh interest savings against the lack of tax deductibility.

IRS Limits & The 2026 Standard Deduction

To claim a mortgage interest deduction, you must itemize your deductions. For the 2026 tax year, the Standard Deduction has increased:

✅ Married Filing Jointly: $32,200
✅ Single / Married Filing Separately: $16,100
✅ Head of Household: $24,150

The $40,400 SALT Cap: A major win for 2026 is the increased State and Local Tax (SALT) deduction cap, which has risen to $40,400 (indexed for inflation). This makes itemizing much more attractive for Kansas City homeowners who pay significant property and state income taxes.

The $750,000 Cap: Mortgage interest is only deductible on total principal balances up to $750,000 ($375,000 if married filing separately).

NEW FOR 2026: PMI Deduction Is Permanent

Starting in 2026, the OBBB permanently reinstates the Private Mortgage Insurance (PMI) deduction. If your refinance results in an LTV above 80%, you can deduct those premiums as mortgage interest.

Income Limits: This deduction begins to phase out for homeowners with an Adjusted Gross Income (AGI) above $100,000 and disappears completely at $110,000 ($50k/$55k for married filing separately).

Handling Points & Closing Fees

Unlike a purchase loan where points may be deductible immediately, points paid on a refinance must be amortized (spread out) over the life of the loan. On a 360-month (30-year) loan, you deduct 1/360th of the points for every monthly payment made during the tax year.

Refinance Tip: If you use a portion of the cash-out funds for home improvements, you can deduct the portion of points associated with those improvements in full during the year they were paid, provided you paid them with unborrowed funds.