Cash-Out Refinancing and Income Tax Filing

A cash-out refinance will have tax repercussions if the cash out amount exceeds $100,000. This will result in a capital gain to the homeowner and will require reporting. The homeowner will receive a 1099 form from the lender that will indicate the amount of capital gains must be reported on the tax returns.  

Capital Gains

Depending on the length of time of the original loan, the gain will be treated as a short term or long term investment. If the original loan was 12 months or less, it is considered a short term investment. The maximum tax rate for short-term capital gains, based on income and tax bracket is 35 percent. 

Anything exceeding 12 months is treated as a long term investment. Long-term capital gains have a maximum tax rate of 15 percent.

Tax Strategy

Mortgage interest is tax deductible so paying off debt with higher rates and debt that is not a deductible with cash-out proceeds is an excellent way to maximize your deductions. For example, a credit card balance may be $25,000 with a rate of 12 percent. The credit card interest is not tax deductible. If the card balance is paid with the proceeds of a refinance, the new rate of a given refinance can be 6 to 8 percent and the interest is tax deductible. Therefore, the borrower has a lower payment and a tax deduction.