Tax Implications of Cash-Out Refinances
Cash-out refinances are not taxable events — the proceeds are loan proceeds, not income. But the implications for basis, depreciation, and future gain can still be material. Working through the tax picture before the refinance helps avoid surprises later.
Proceeds Are Not Income
This is the foundation. Cash you receive from a cash-out refinance is not taxable income because you are receiving loan proceeds — you are still liable to repay them. This is true at both federal and state levels.
Basis Is Unaffected
Your tax basis in the property does not change simply because of a refinance. The asset side of your balance sheet remains the same; what changes is the debt side.
Interest Deductibility
Interest on the increased loan amount is generally deductible against the property's rental income, subject to various passive activity, at-risk, and excess business interest limitations. The trace of how proceeds are used can matter for deductibility in some situations.
Future Gain on Sale
When the property is eventually sold, the gain is calculated as sales price minus adjusted basis. The mortgage balance is irrelevant to the gain calculation. So a heavily refinanced property can produce a sale where the proceeds barely cover the mortgage and the seller still owes tax on a large gain.
Educational content only — not advice. KQT Advisors, LLC is a commercial loan broker; we are not a lender, attorney, accountant, financial advisor, or fiduciary. We do not originate loans or make lending decisions. The information in this article is provided strictly for general informational and educational purposes and reflects our understanding at the time of writing. It is not — and must not be construed as — financial, tax, legal, accounting, investment, or any other professional advice, and creates no advisor-client relationship. Loan programs, rates, terms, eligibility requirements, fees, and approval criteria are set by individual lenders, the SBA, and other parties and are subject to change at any time without notice. Examples are illustrative only and not guarantees of outcome. Nothing here is a commitment to lend, an offer of credit, or a representation that any specific structure will be available to or appropriate for any borrower. Always consult your own qualified financial, tax, and legal advisors before acting on any information in this article. To the maximum extent permitted by law, KQT Advisors, LLC and its principals, employees, agents, and affiliates disclaim all liability for any direct, indirect, consequential, or incidental loss or damage arising out of any use of, reliance on, or inability to use the information in this article.