Cash from a cash-out refinance of a home

Does a cash-out refinance affect property taxes?

Are you thinking about a cash-out refinance? If so, you might be wondering if that will affect your property taxes. Quite simply, the answer is no, a cash-out refinance won’t affect your property taxes, that is unless your property value increases.

Some people consider doing a cash-out refinance for home improvements, debt consolidation, investing, or for other financial needs. It’s a type of refinancing program that replaces the existing mortgage you have with a new home loan. This new home loan can reach up to 80% of your property’s value. So, if your home’s value increased from when you bought it, you get that difference in cash to invest.

More cash to invest sounds good, right? Before you go for a cash-out refinance though, I want to give you more information so you can make the best decision for your needs.

Surely, doing a cash-out refinance is one of the best ways to lower your monthly mortgage payment especially if you get a better interest rate. Doing this usually won’t change your property taxes. The exception is if your mortgage company anticipates your property values rising higher in the not-so-distant future.

Keep reading and I’m going to tell you all about cash-out refinancing, taxes, and what all this will mean to you.

Tax rules for cash-out refinancing

As a landlord, you probably know that your mortgage is tax-deductible. That’s a good thing when crunching those numbers before Tax Day every year. But there’s a special consideration that affects cash-out refinancing. If you still want to qualify for your yearly tax deduction on your mortgage, that cash-out refinancing must be used to build or improve your existing property or buy a second investment property.

In other words, if you go into a cash-out refinance to use the funds for some other means, you’re no longer able to qualify for that mortgage debt tax deduction. When you use that cash-out refinancing to fund other purposes unaffiliated with repairing or improving your home (or investing in another home), tax laws consider it a home equity loan. Interest that is paid on home equity loans is tax-deductible still, but there’s a cap at $100,000 debt for couples and only $50,000 for a single person.

I think it helps to look at a living example of that. After all, I’m a numbers person, but not everyone else is.

Let’s say you’re a single homeowner and you owe $200,000 on your mortgage. You decide you want to go for a cash-out refinance in the amount of $275,000 so you can add a couple more rooms onto your home. Go big or go home, right?

Anyway, that mortgage interest that you pay on the entire sum (which is $275,000 in this example) is still tax-deductible because it falls under those qualifications I detailed above – you’re using it to improve your home and you’re also under the limit set for a single homeowner.

But what if you decided to do a cash-out refinance and not improve your home? You can do that, and you might want to depending on your circumstances. Perhaps you’re raising kids on your own and they’re ready to go to college. If you never set up a prepaid college fund, you might be thinking that this could be the way you get them a higher education.

So, if you took that $75,000 and put your kids through 4 years of college, you can deduct mortgage interest only from $50,000 of the new debt as a single homeowner (if you were married, it would be more). In other words, interest on $250,000 of that refinanced amount is tax-deductible and the remaining $25,000 is not.

As you can see, doing a cash-out refinance is best when you’re going to improve your home though you do have options to use it in other ways as needed. I’m going to give you all the facts about the impacts of that further down so keep reading.

Here’s How Your Property Tax is Calculated

Property taxes can sound like a pain, especially when you’re trying to compute them. New homeowners often find this to be the biggest headache. Here’s how you can figure them out without making your head spin.

Basically, there are two numbers that will be what you use to calculate what you will pay in property taxes every year. This comes from your tax rate and your assessment. I’ll give you an example to help illustrate this.

Say you have a home worth $300,000 in the assessment and you have a tax rate of 3%. This means you will pay property tax of $9,000 per year. Those property taxes aren’t going to go up unless either the assessment amount or the rate increases, and if you choose to do a cash-out refinance on your home – (appraisal included) it will not affect those numbers.

There are times when that property tax can be joined to the refinancing, but it can only happen when it’s in the form of a prediction. I know that sounds vague but hear me out.

When you have an area that is ultra-hot for real estate and the home values all around are suddenly skyrocketing, if the appraisal amount is significantly higher than that assessed value, you can likely count on a property tax increase down the line. It’s not always accurate though, nor is it ever an immediate thing, so breathe!

Any changes to the assessment take place at a much slower rate than the rise of prices for the housing market. They’re usually just adjusted once each year. Plus, many areas have laws in place about how much those property taxes can be raised during certain time frames.

And yes, this is going to vary from state to state and from city to city. You can expect these costs to be much lower in less populated areas that aren’t experiencing a boom of growth. But for places like California where everyone wants to live the easy, breezy, beachy lifestyle, it’s considered a hot market.

In fact, let me give you an example for California to add more illustration to my point. California has Proposition 13. It’s a formula to help compute property taxes which doesn’t really have a hand in the current market value or what your home is really worth. This formula is mostly based on your purchase price, plus 2% yearly compounded. If your California home is less than the amount you come up with when you crunch the numbers, you need to talk to the county assessor. If it’s more than that, they can’t raise it past that number.

But of course, there’s some more to the story, so stay with me!

Appraisals and Property Taxes

Refinancing won’t affect your property taxes directly except in that one instance, but it CAN give you a heads up that there will be an increase coming your way. When you do a cash-out refinance, a property appraisal is generally requested in the mountain of paperwork you have to complete for the process.

When you’re going through all this, you might suddenly see that your home’s value has quickly gone higher. The good news is that it won’t be reported to the property tax assessor. What you should be watching out for is when the local property assessor makes a determination on the value of your home. It all depends on where you live for how often they will do this. In some places, they do it once a year. In others, it’s every five years. And it can also be somewhere between one and five years.

A mortgage calculator can help you try to see into the future. It’s not a crystal ball, but hey, it works to give you a ballpark estimate. The mill levy, the calculation your local authorities use, will be the prime influencer though in this situation.

Property Reassessments

That brings us to property reassessments. The tax authorities in your area will conduct property value reassessments in certain situations. Typically, you can expect this to happen when:

  • The home has changed ownership (so, when you buy your house from the previous owners).
  • The home has been newly constructed from the ground up.
  • The home has had partial construction completed.
  • The value of the home declines.

That first one probably jogged your memory from when you bought your home from the previous owners. Remember having to get the property appraiser to come out? If you just built your home or had work done on it, you’ve probably had an assessment too.

But what if those market values fall? Well, you’ll have to call them and inquire about having the property taxes reduced.

With those exceptions I just mentioned, you can expect that those assessors will take a look every two to three years. A cash-out refinance doesn’t involve anything with the assessors. That’s because there’s no change to the ownership. This is a matter between you and the lender, so this in almost every case will not affect property taxes on your home.

Refinancing to Remodel May Increase Your Property Taxes

How old is your home? Perhaps your kitchen or master bath is outdated. Whether you’re hoping to bring it up to speed for your own enjoyment or you are considering selling the property at some point, remodeling is always a good idea to keep up the value of your home.

However, when you do a cash-out refinance to make these changes, you may very well see an increase on your property taxes from whatever work you have done. Perhaps you’ve decided that kitchen is too small, or you would rather add another bathroom onto the house, so your kids stop bickering. If you increase the square footage of your home, that will change the assessed value.

Assessed value is rather predictable, and again, I recommend using the ol’ crystal ball known as the mortgage calculator to get a general idea of how much you’ll likely pay. All you need to plug in is the property tax rate for where you live and your current value.

Let me put some real numbers with that to help you visualize this better. Remember when I brought up the earlier example of a 3% tax rate and a home value of $300,000? Say you increase the value of your home by $30,000. As $300,000 plus $30,000 is $330,000 your new property taxes would be $9,900.

Is a cash-out refinance tax-deductible?

Well, it could be. As I discussed above, that cash out isn’t like income, but it COULD be tax-deductible. There are certainly limits of indebtedness. If you’re married, it’s $750,000, or if you’re single and or married and filing separately, it’s $375,000.

But that doesn’t matter when the indebtedness incurred. The interest can only be deducted as I said with making home improvements, building onto the home, or buying a second property. Cash used to fund a renovation in your home, or even in a second property, could be deductible if you itemize the expenses.

When you use that cash-out refinance to tackle debts that are unaffiliated with your home though (student loans, credit cards, and other such things), you can almost always count on that not qualifying for your tax deduction. The IRS lists this in Publication 936, but to be honest, it’s incredibly boring stuff. That’s why I’m here to give you the lowdown and cut to the meat of what you need before your eyes glaze over in boredom.

If you’re still not sure how to make those renovations work in your favor for deductions on your taxes when you’ve done cash-out refinancing, you can and should consult an esteemed CPA to help you make sure you get any deductions you deserve. It’s their job to understand confusing tax laws and help you use them to your best advantage when applicable.

And then there’s the matter of cash-out refinancing for those that own properties and rent them out.

Refinancing may increase the amount of interest you’re able to expense against your rental income

Just about every refinance of a mortgage on an investment property will change the amount of interest you’re going to pay. Let’s say though that your rate remains the same – even then, re-amortizing your loan changes the proportion. Interest, principal, and payments now will have a new relationship.

The IRS lets you expense all your interest that you pay for investment property without the same limitations that residential mortgages have. So, refinancing will either increase or decrease that interest you can expense against rental income from your Schedule E. Yes, that means a cash-out refinance might just be for you if this is your situation. It could work to your benefit. For more on that, keep reading!

Cash-out Refinances and 1031 Exchanges

There are quite a number of property investors out there that will utilize cash-out refinancing as a way to get more cash out of their properties which are sold via a 1031 tax-deferred exchange. This means you can sell a property and then turn around and buy another one. You defer the capital gains and depreciation while recapturing tax liability. You don’t get to pull any cash out of the transaction. But when you sell the old property, buy a new one, and do that cash-out refinance to pull cash from your new property, all works out.

See, the IRS doesn’t have any set rules in all that lengthy mumbo-jumbo, which can work in your favor. Still, I advise you talk with a tax attorney who is familiar with 1031 exchanges so you can use this method for your benefit without coming under fire with the IRS.

Impact of Cash-out Refinance on the Sale Of a Property

Remember, when you take money out of the property you own, it doesn’t impact the tax. Let’s say Bob and Cindy are a married couple that bought a $100,000 property. They kept it for quite a few years, then sold it off for a cool million. Bob and Cindy would now have a taxable gain of $400,000. $500,000 of that is an exclusion. But let’s say just for fun that they had an $800,000 mortgage on that property during the time of sale and got back just $130,000 after paying the commissions on the brokerage and loan, they’d still need to pay capital gains taxes on that whole $400,000.

Basically, what happened here with Bob and Cindy is that the cash-out refinance did not work in their favor. Don’t be like Bob and Cindy. Keep reading, and I’m going to take you through the scenarios of when a cash-out refinance is a good idea and when it’s not.

So, when should you refinance a property?

Here’s my ultimate list of things that might come up for cash-out refinancing and whether or not they’re a good or bad move.

– To make improvements – Good!

As I detailed above, you can still get those mortgage tax deductions when you invest that cash into making your home a better place.

– Other investments apart from real estate – Bad!

You definitely don’t want to do this with stocks, bonds, and the like. You won’t get any deductions here, and one wrong move and you’ll be out even more cash than when you started.

– Vacations and luxury goods – Bad!

Again, you’re not getting a tax deduction here. It stands to reason that if you have to take out loans to live a life higher than your means, it’s just a terrible idea all around.

– College tuition and student loans – Bad!

Above, I mentioned a single person putting their kids through college with it. In that example, the amount not covered by mortgage tax deductions was relatively small. In a situation like that, if you have no other way, it could work, but you’re much better off not putting your kids through college this way. Especially if your kid comes home one day and says they want to backpack through Europe for a decade and have dropped out. As for student loans, it’s a bad idea for the same reasons.

– Buying another property – Good!

When you use it to make a down payment to purchase another property, this is a wise way to go. You get that mortgage tax deduction which makes the investment even more worthwhile.

– Paying off high-interest debts from credit cards, car loans, or personal loans – Bad!

Please don’t do this. Of all the bad moves I’ve covered so far, this one is THE worst! You’re creating more debt to do this. If you have debts, work toward paying them off. A cash-out refinance is not going to help your situation and solve credit woes.

– Preparing for an emergency – Bad!

If you want to pad your checking account so that if an emergency arises, you’re prepared, that’s good. But don’t do it with a cash-out refinance. You don’t get any rewards for that.

– You want more cash – Bad!

If you want more cash, make smart moves to get it. Don’t pull a cash-out refinance just so you can feel like a high roller. It’s only going to come back and haunt you like a thousand ghosts.

Something else you should know is that refinancing might not affect property taxes, but your property taxes might be the reason you decide to refinance. Those annoying postcards are a major downer to find in your mailbox. You check the mail, and amid birthday cards or holiday cards, there’s a seemingly innocent postcard from the county appraiser with the sullen news announcing that your taxes are increasing. In this case, refinancing might be the way you can get that money.

A cash-out refinance gives you extra money from what your home’s value is in cash, and while it is a good idea in some situations, it is not ideal in all situations. Some situations will work in your benefit. The rate and term of a refinance can help lower monthly payments or drop your mortgage insurance rates, but with a cash out, you can get that cash you need for other things.

It’s certainly best to invest that cash into your own home or another property, and while it does you no favors for tax deductions on your mortgage when you have to pay taxes, if you’re really pressed, you can use it to help with other debts. It should be a last resort for the latter and is a great tool for future investments.

If you use it for debt consolidation on higher interest rate credit cards, you can pay off your balance with the mortgage at a much lower rate, like 5 to 8% instead. But there is a huge risk here if you don’t make your mortgage payments. A better way is to transfer the balance for credit cards and land your way into a 0% APR for a while.

Making payments to your home that will boost market value? This will lower your loan to value ratio and give your home more equity. What matters is if this makes any sense financially to use a cash-out refinance in your situation.

As always, there are fees you’ll incur when you take out a second mortgage. The fees are even ore if you plan to refinance a first mortgage and take cash out. While it is helpful for homeowners in dire straits, a cash-out basically turns back the clock on your mortgage. You lose all that equity you’ve spent all this time building up. So, less equity, more debt.

Only you can decide if that trade-off makes sense for your situation.


In almost every situation under the sun, a cash-out refinance won’t affect your property taxes. You should think about why you’re considering this type of refinancing. Since it lowers your equity and increases your debt, it’s an ideal choice for those reinvesting it. Making home improvements by adding rooms or bathrooms, renovating kitchens, and things of this nature add value, which will turn back over for you in the long run.

It’s the same with buying another property since these can help you get deductions on your taxes. When working with commercial properties as a landlord, you should always get a good CPA who can help you steer your taxes in your favor, so a cash-out refinance will work its magic for you.


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