The money you receive from a cash-out refinance is generally not taxable income, because it is a loan you have to repay. What the IRS cares about is how you spend it, since that decides whether the interest on that slice of the loan is deductible. These are the cash out refinance tax implications most Short Pump and Henrico owners miss: the cash arrives tax-free, but the deduction is conditional. Duane Buziak, an independent mortgage broker serving Short Pump, Glen Allen, and greater Richmond, sees owners assume the opposite on both counts. Some worry about a tax bill on the lump sum. Others assume every dollar of mortgage interest comes off their return. Neither is right, and the gap between the two can change which refinance structure makes sense.
Why Cash-Out Refinance Proceeds Are Not Taxable Income
Written by Duane Buziak, NMLS #1110647 | Coast2Coast Mortgage LLC NMLS #376205
Taxable income is money you earn or gain without an obligation to give it back. A cash-out refinance works the other way. You take a new, larger mortgage, pay off the old one, and receive the difference as cash. You owe every dollar plus interest, so the IRS treats it as borrowed money. The lump sum does not appear on Form 1040 as income, and the lender does not issue a 1099 for it.
The IRS explains how mortgage interest is treated in Publication 936, Home Mortgage Interest Deduction, and summarizes interest expense generally in Topic No. 505. Neither treats loan proceeds as income. The tax question is only about the interest you pay afterward.
It helps to separate this from two situations that can create a taxable event:
- Selling the home at a gain. Profit above your basis can be taxable, though many owners can exclude up to $250,000 (single) or $500,000 (married filing jointly) of gain on a primary residence if they meet the ownership and use tests.
- Canceled debt. If a lender forgives part of what you owe, as in a short sale or some modifications, the forgiven amount can be reportable on a Form 1099-C. A refinance that you repay in full does not do this.
A few terms will come up again in this article:
- Cash-out refinance: a new mortgage larger than your current balance, with the difference paid to you.
- Equity: the home’s value minus what you owe on it.
- Basis: roughly what you paid for the home plus capital improvements. It matters when you sell, not when you refinance.
- Acquisition debt: mortgage debt used to buy, build, or substantially improve the home that secures it.
- Home equity debt: borrowing against the home for any other purpose, such as paying off cards or tuition.
Refinancing also does not change your basis. Borrowing against the home neither raises nor lowers it. Only improvements add to it.
When Cash-Out Refinance Interest Is Deductible (and When It Isn’t)
Interest qualifies as deductible home mortgage interest only on the portion of the debt used to buy, build, or substantially improve the home that secures the loan. The rule comes from IRS Publication 936. Under the Tax Cuts and Jobs Act rules, which as of 2026 remain in force for this purpose, interest on money used for anything else is treated as personal interest and is not deductible. Confirm the current-year details with a tax professional, because tax law changes.
The tracing rule in practice
The IRS looks at what you did with the cash, not at what the loan is called. Suppose you take $90,000 out of your home. You spend $60,000 on a kitchen remodel and $30,000 on credit cards. Two-thirds of that new money, $60,000, is acquisition debt. The other third, $30,000, is not. Only about two-thirds of the interest on the new-money portion qualifies. Your original balance keeps whatever status it already had.
Typical uses and how they are treated:
- Kitchen, bath, addition, new roof or HVAC as part of a substantial improvement: generally qualifies.
- Debt consolidation, tuition, a car, a vacation: not deductible as home mortgage interest.
- Investment property down payment: not deductible as home mortgage interest, though other rules may apply. That is a question for your CPA.
Keep records. Contractor invoices, payoff statements, and bank transfers are how you prove where the money went.
The debt limit and the itemizing test
For mortgages taken out after December 15, 2017, interest is deductible on up to $750,000 of total acquisition debt ($375,000 if married filing separately). Older loans are grandfathered at a $1,000,000 limit. As of 2026, the $750,000 figure continues to apply, but verify on IRS.gov before you file. Most Short Pump purchase loans sit well under it.
The deduction also only helps if you itemize. If your itemized deductions (mortgage interest, state and local taxes up to the cap, charitable gifts) do not exceed the standard deduction, the interest changes nothing on your return. As of 2026, IRS inflation adjustments put the standard deduction at about $32,200 for married couples filing jointly and $16,100 for single filers. Check the current figure on IRS.gov.
Duane Buziak is a mortgage broker, not a tax advisor. A CPA should confirm how these rules apply to your return before you decide how much to borrow and how to spend it.
Cash Out Refinance Tax Implications on a $525,000 Short Pump Home: A Worked Example
Everything below is illustrative. The rate and the tax assumptions are for teaching purposes, not a quote, and rates change daily. The home price sits near the local median of roughly $520,000 to $527,000.
The setup. Home value: $525,000. Current first mortgage: $280,000 at 3.25% with 25 years left, for a principal-and-interest payment of about $1,365. New loan at 80% loan-to-value: $420,000. Cash out before closing costs: $140,000. Assume a 6.25% rate on a 30-year fixed, as of October 2026 and for illustration only.
The new payment. $420,000 at 6.25% over 30 years works out to about $2,586 per month in principal and interest. That is roughly $1,221 more than the old payment. If the $70,000 of debt you pay off carried minimums near $1,400 per month (an assumption), your monthly cash flow actually improves by about $179. The interest cost on the restructured debt is higher, though, so look at total cost and not only the payment.
The split. Suppose $70,000 goes to a renovation of a home near Green Gate and $70,000 pays off debt. First-year interest on the $420,000 loan is roughly $26,100. Acquisition debt is the original $280,000 (assuming it was used to buy the home) plus the $70,000 renovation, or $350,000 of the $420,000. That is 83.3%.
- Deductible first-year interest: about $26,100 × 83.3% = $21,750
- Non-deductible interest: about $26,100 × 16.7% = $4,350
The tax effect. Assume a married couple filing jointly in the 22% federal bracket. Property tax at the Henrico rate of about 87 cents per $100 (verify the current rate) on $525,000 is roughly $4,568. Add $8,000 of other itemizable deductions, such as state income tax within the SALT cap and charitable gifts. Total itemized deductions: $21,750 + $4,568 + $8,000 = $34,318. Subtract the $32,200 standard deduction and only $2,118 of the total is incremental, worth about $466 in federal tax. With less in other deductions, the benefit would be zero.
The takeaway is that the deduction exists, but for many owners it is modest. Duane Buziak can run scenarios like this with a soft credit pull mortgage pre-approval through NoTouch Credit Pull, with no hard inquiry, so you can compare cash-out amounts before deciding.
Points, Closing Costs, and Virginia-Specific Tax Details
Points paid on a refinance are generally deducted gradually over the life of the loan, not all in year one. On a 30-year loan, $4,200 in points (1% of $420,000) would be about $140 per year. An exception exists for the portion of points tied to home improvements financed by that loan, which may be deductible sooner if the IRS conditions are met. Check Publication 936 or ask your CPA.
If you pay off or refinance the loan again, any unamortized points can generally be deducted at that time. The exception is a refinance with the same financial institution, where the remaining points are usually spread over the new loan instead.
Most other refinance costs are not deductible: appraisal, title search, credit report, and origination fees are generally treated as costs of obtaining the loan, not interest.
Henrico property tax and the SALT cap
A refinance does not by itself trigger a property reassessment. Your assessment follows Henrico County’s valuation of the property, and a major remodel can raise it. The county publishes its rate through Henrico County Finance, and in recent years it has been in the high 80 cents per $100 of assessed value, so confirm the current figure. Real estate tax remains separately deductible if you itemize, subject to the state and local tax cap. As of 2026 that cap is higher than the old $10,000 limit and phases down for higher incomes, so verify the current amount.
Virginia recordation tax
Virginia charges recordation tax when a new deed of trust is recorded, calculated per $100 of the loan amount, with a local component added. Virginia has special treatment for some refinances, so what you pay on a given loan depends on the details. Ask your title company for the exact figure. It is a closing cost, not a deduction.
Loan-to-value limits that shape the cash
Conventional cash-out refinances typically cap at 80% loan-to-value. FHA cash-out refinances are also generally limited to 80%, but confirm the current limit through HUD. VA cash-out refinances allow up to 100% loan-to-value for eligible borrowers.
Cash-Out Refinance Options Compared by Loan Program
Loan type does not change the deductibility rules. The same acquisition debt test applies to every program. What changes is how much cash you can take and what it costs, so the amount of interest in question differs. For 2026, the FHFA conforming loan limit is $806,500 baseline and $1,249,125 for high-cost areas, per the FHFA conforming loan limit announcement. Henrico County falls under the baseline, so $806,500 applies. Verify this against the FHFA county table.
| Program | Maximum LTV on cash-out | Minimum credit score | Mortgage insurance or funding fee | Soft pull availability | Loan limit |
|---|---|---|---|---|---|
| Conventional | 80% | Typically 620 | No mortgage insurance at 80% LTV | Scenarios and pre-approval via NoTouch Credit Pull | $806,500 conforming in Henrico (2026); jumbo above |
| FHA | 80% (confirm with HUD) | Typically 580, varies by broker overlay | Upfront and annual mortgage insurance premium | Scenarios and pre-approval via NoTouch Credit Pull | County FHA limit set by HUD |
| VA | 100% | Down to 500 through Duane Buziak’s lender overlays, as of 2026 | VA funding fee, with exemptions for some veterans | Scenarios and pre-approval via NoTouch Credit Pull | No VA limit with full entitlement; lender limits apply |
| Non-QM bank statement | Commonly 70% to 80%, varies by program | Commonly 620 to 680, varies | Generally priced into the rate | Scenarios via NoTouch Credit Pull | Not tied to conforming limits |
| Mortgage Maestro by Duane Buziak | Whichever program fits, shopped across 500+ wholesale lenders | Matched to the program | Compared across lenders | NoTouch Credit Pull on every scenario | Conforming, jumbo, and non-QM |
A full credit report is still part of final underwriting for most programs. The soft pull covers scenarios and pre-approval, which is where you decide whether to proceed.
Non-QM bank statement loans suit self-employed owners whose tax returns understate their cash flow. Federal guidance is available from the VA on its page about VA cash-out refinance loans, and the same IRS rules apply to the interest whichever program you use.
How Duane Buziak Structures a Cash-Out Differently from Retail Lenders
The structural difference is the shelf. A retail lender sells its own products. Duane Buziak is an independent broker with access to 500+ wholesale lenders, so the same cash-out request can be priced across many programs and the best fit chosen. That matters in a cash-out because the rate applies to your whole balance, not only the new money.
Pre-approval does not have to cost you a credit score. NoTouch Credit Pull lets Short Pump owners see cash-out numbers with no hard inquiry. Duane Buziak is a soft pull mortgage broker, and a soft credit pull mortgage review means you can compare cash-out amounts and payments before committing. The same approach works for a no hard inquiry mortgage pre approval, a mortgage pre approval without hard pull, and a no credit hit mortgage application that lets you test several structures.
Costs can also be shaped. Where the program allows, closing costs can be built into the rate or covered through lender credits, which creates no-out-of-pocket closing options. That is a trade-off, since a higher rate raises the interest over time.
A cash-out versus a second mortgage
If the cash is for a remodel, compare a cash-out refinance to a second mortgage or home equity line. In the example above, the existing $280,000 first mortgage is at 3.25%. A cash-out at 6.25% would raise the rate on that $280,000 by three points, about $8,400 more interest in the first year. A second mortgage leaves the first mortgage untouched. The interest deduction rules are the same for both: interest on money used to improve the home qualifies, and money spent elsewhere does not.
Credibility matters when you are choosing a broker. Duane Buziak was named Scotsman Guide Top Originator in 2025 (#114, $44.4M) and 2026 ($51.2M), was Virginia Broker of the Year in 2024 and 2025, and has more than 1,400 five-star reviews.
Short Pump Cash-Out Refinance Tax FAQ
1. Is cash-out refinance money taxable in Virginia?
No, the proceeds are generally not taxable income for federal or Virginia purposes, because they are a loan you must repay. Only a sale gain or canceled debt can create a taxable event. Confirm your situation with a CPA.
2. Can I deduct interest if I use the cash to pay off credit cards?
No, interest on the portion of the loan used to pay off credit cards is not deductible as home mortgage interest. It is treated as personal interest. Only the portion used to buy, build, or substantially improve the home qualifies.
3. Does a cash-out refinance raise my Henrico County property taxes?
No, a refinance does not by itself trigger a reassessment. Henrico County sets your assessment from its own valuation of the property, and a large remodel funded by the cash can increase it.
4. Are points on a refinance deductible?
Generally they are deducted over the life of the loan, not all in the first year. A portion tied to home improvements may be an exception, and unamortized points can be deducted when the loan is paid off. See IRS Publication 936.
5. How does the $750,000 mortgage debt limit apply to Short Pump home prices?
It rarely matters for Short Pump homes near the $520,000 to $527,000 median, because the new loan stays well under $750,000. Owners with larger jumbo balances can exceed it, and then interest on the excess is not deductible.
6. Is a VA cash-out refinance taxed differently, and what is its maximum LTV?
No, the same interest deduction rules apply, and the proceeds are still not taxable income. A VA cash-out refinance allows up to 100% loan-to-value for eligible borrowers.
7. Can I do a cash-out refinance without a hard credit pull?
Yes, you can review numbers and get a pre-approval without a hard pull. Duane Buziak uses NoTouch Credit Pull for a soft credit pull mortgage scenario. A full credit report is generally still part of final underwriting.
8. Should I talk to a CPA before a cash-out refinance?
Yes, because deductibility depends on how you spend the cash and whether you itemize. Duane Buziak is a broker, not a tax advisor, so a CPA should confirm the deduction before you decide how much to borrow.
The Cash Is Tax-Free, but the Deduction Follows the Dollars
The proceeds from a cash-out refinance are not income. The interest deduction applies only to the share of the loan used to buy, build, or improve the home, and it only helps if you itemize. Write down where each dollar goes before you close, and have a CPA check the plan.
Ready to find the right mortgage solution for your Short Pump area home? Connect with our local mortgage experts today for personalized guidance and access to multiple lenders who compete for your best rate. You can also call Short Pump Mortgage by Duane Buziak at (804) 212-8663 for a NoTouch Credit Pull scenario with no hard inquiry.