Tax on cash-out from refi

Forum|Forum|3 years ago
June 10, 2022
7 replies
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Hi, I just closed on refinancing home and I cashed-out some of my equity. The mortgage company deposited a little over $12,000 into my checking account. I know banks have to report deposits over $10,000 to the IRS.

Is this going to cause a problem for me with the IRS? Do I have to pay taxes on ''cash''from the equity in my home received from just refinancing my home?

Not A Product Question

Mike9241

assuming this was your first or second home. the only tax issue that arises is that if you refi'd for more than the mortgage balance the excess unless used to substantially improve the property or possible for some other non-personal purpose is not te=reated as mortgage debt and the interest paid on that portion is not deductible.

TomD8

Employee

Q: "Do I have to pay taxes on ''cash'' from the equity in my home received from just refinancing my home?"

No. The IRS doesn’t view the money you take from a cash-out refinance as income – instead, it’s considered an additional loan. But, as @Mike9241 pointed out, there are certain rules you must follow in order to claim the mortgage interest deduction.

**Answers are correct to the best of my ability but do not constitute tax or legal advice.

rjs

Employee

@popadoc45 wrote:

I know banks have to report deposits over $10,000 to the IRS.

Banks have to report deposits of $10,000 or more in cash, meaning actual currency. The mortgage company probably made an electronic deposit, or deposited a check. That's not what's meant by "cash" for reporting requirements. The deposit will not be reported to the IRS.

Opus 17

Employee

Borrowing money is never taxable income (regardless of whether it is reported) because it's not income--if you promise to pay the money back, it's not really your money. However, if you default on the loan or it is forgiven by the lender, it does become taxable income at that time, since you don't have to repay it anymore and it is now your money.

Carl11_2

Employee

Is this going to cause a problem for me with the IRS?

Short answer - No.

Borrowed money is not your money. Never was. Is not now. Never will be so long as you pay it back as agreed.

NCPERSON1

@popadoc45 - while I agree with all stated by others, the issue isn't with the cash-out being taxable, the issue is how much of the interest is tax-deductible going forward

if that $12,000 is being used to substaintially improve that same home, then the interest on the $12,000 is going to be deductible,

but if you are just pocketing the money and not re-investing it back into your home. the related interest is not deductible. As the new loan amortizes down, this first $12,000 is paid back first, so it won't be that many years of determining the non-deductible portion of the interest.

fanfare

Employee

"As the new loan amortizes down, this first $12,000 is paid back first, "

Where do you get that idea?

Your deductible Interest is prorated for other purposes, v.s. home-related purposes, from year one.

@NCPERSON1

Carl11_2

Employee

As I've always understood it, the percentage of the interest equal to the percentage of the refi used to pay off the prior loan, is what is deductible over the life of the new loan. That percentage of deductible interest can increase, even at a later date, all the way to 100%, depending on what the cash out amount is used for.

Mike9241

another thing is it's not the interest on the $12K that won't be deductible it's actually the interest on the increase in the mortgage balance. when you refi the mortgage balance increases by $X but from that $X amounts are usually deducted to pay the closing and other costs. see @NCPERSON1 answer.