Cash-Out Refinances: A Tax-Smart Tool for Real Estate Investors
Real estate investors are constantly looking for ways to unlock capital, grow their portfolios, and minimize taxes. One powerful (and often underutilized) strategy is the cash-out refinance. When used correctly, it can supercharge your investment potential — without triggering a tax bill. In this article, we’ll break down how cash-out refinances work, their tax implications, and how savvy investors are using them to build wealth strategically.
What Is a Cash-Out Refinance?
A cash-out refinance is when you replace an existing mortgage with a new, larger loan — and take the difference out in cash. This is different from a traditional refinance, where you're simply adjusting your loan terms or interest rate.
Example:
Original mortgage balance: $200,000
Property’s current appraised value: $500,000
New mortgage: $350,000
Cash received at closing: $150,000 (minus closing costs)
That $150,000 is yours to use as you see fit — invest in another property, renovate, pay off debt, or build reserves.
Is Cash-Out Refinance Money Taxable?
Here’s the key tax advantage: The cash you receive from a refinance is not taxable income.
Why? Because it’s a loan — not earned income or a capital gain. You’re simply borrowing against the equity in your property. That means:
No capital gains tax
No depreciation recapture
No reportable income on your tax return
This makes it one of the most tax-efficient ways to access capital from your investment properties.
Can You Deduct the Interest?
Yes — but with a few important caveats.
Interest on the new mortgage may be deductible if the loan is secured by the property and the funds are used for business or investment purposes. If you’re using the cash for personal expenses (like paying off credit cards or buying a car), that interest may not be deductible.
Best practice: Keep detailed records of how you use the proceeds. If you reinvest the funds into your real estate business — say, for renovations, down payments, or buying another rental — the interest on that portion may be deductible as a business expense.
What About Depreciation?
One common misconception is that a cash-out refinance changes your depreciation basis. It does not. Depreciation is based on the original cost of the property (excluding land), not your current loan balance.
Even if you refinance for a higher amount, your depreciation schedule stays the same — unless you do substantial improvements that qualify as capital expenses.
Strategy Spotlight: The BRRRR Method
Many investors use cash-out refinances as part of the BRRRR strategy:
Buy → Rehab → Rent → Refinance → Repeat
By refinancing after increasing the property’s value through renovations, you can pull out your original capital — or more — tax-free, while continuing to hold the asset and generate rental income.
Key Considerations
Loan terms: Cash-out refinances often come with higher interest rates and closing costs than regular refinances.
Cash reserves: Taking too much equity out of a property can reduce your buffer for emergencies.
Debt load: More leverage can magnify returns — but also risks.
Bottom Line
Cash-out refinances can be a powerful tool in a real estate investor’s toolbox — giving you access to capital without selling and without a tax bill. When used strategically and documented properly, they allow you to scale your portfolio, increase cash flow, and optimize your tax position.
As always, before making any major financial moves, consult with a tax advisor (like us) who understands real estate investing. The right guidance can help you leverage the full power of tax-smart strategies like this one.