Do I have to pay taxes on cash from a mortgage refinance?
February 3, 2021 7:44 AM   Subscribe

I'm looking to refinance my primary residence (a co-op apartment) and get some money out. What are the tax implications? Is this money considered capital gains? What about all the costs associated with the refinance (are these at all deductible)? How does the IRS look at it?
posted by timnyc to Work & Money (3 answers total) 1 user marked this as a favorite
Best answer: No capital gains here - you will only realize capital gains when you sell the asset (your apartment) and usually a lot of that is exempt from capital gains tax anyways if it's your primary home.

I don't know whether it's different for co-op mortgages but your mortgage interest should continue to be deductible. "Points" are considered prepaid interest and can be tax deductible (although I think it's a little less clear-cut than with regular old interest). Most other mortgage fees are not tax-deductible, but for instance the last time I refinanced (late last year) I got a credit from the lender that brought my fees to $0, so it may not matter all that much.

Of course all of this only tax-deductible if you are itemizing, so in effect it's only the amount above the standard deduction that matters - e.g. if you paid $15,000 in mortgage interest in 2020, you'd be able to deduct that interest, but you would have been able to deduct $12,400 anyway because that's the standard deduction. (Also consider any other itemizable deductions, of course.)
posted by mskyle at 8:02 AM on February 3, 2021 [1 favorite]

Best answer: The cash you get out is an additional loan, so the IRS does not see it as income or gains that would be taxed.

Of your closing costs, only interest and property taxes are deductible. The property taxes don't change here -- they'll get treated as they usually do (if you impound them with your mortgage, you'll remit them to a different company, but in the end you'll pay the state the same amount).

The interest changes, and any interest you pay is potentially deductible. Any points you pay are deductible over the life of the loan. Turbo tax will handle this for you -- interest and points get reported to IRS, and you or your software will enter them in tax forms as instructed.
posted by Dashy at 8:03 AM on February 3, 2021 [1 favorite]

Best answer: Not a tax expert but I just muddied through this on H&R Block.

Interest: Most of the interest is deductible. The portion of interest attributable to the cash-out is not, unless you used the cash to make capital improvements to your residence.

Points: Deductible, but you have to amortize over the life of the mortgage. I found that the H&R Block software wasn't automatically doing this, so I had to replace the 1098 Box 6 entry (points paid on principal residence) with my own calculated amortized value.
posted by bassooner at 8:09 AM on February 3, 2021

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