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What are the tax implications of getting cash out when refinancing?

Tip of the Month

May 2003

What are the tax implications of getting cash out when refinancing?

Cashing out of your main home is a great tax strategy if you're using the proceeds to pay off other debt on which the interest is not deductible.

An individual is allowed to take out up to $100,000 from their principal residence in addition to the original debt used to buy the home, and deduct the interest charged before it is repaid. For more information on this, check out IRS Publication 936 Home Mortgage Interest Deduction.

This strategy is a winner since it allows the homeowner to possibly refinance other debt that may be at a higher interest rate than rates available on a second mortgage, allows the homeowner to receive a tax benefit by deducting the interest on the loan which in effect let's the government pick up part of the tab on the loan repayment, and lastly, it allows the homeowner to remain in his current home which he may feel he would have to otherwise sell to cash out. The rules are different on cashing out of a rental property.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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