Suppose a Richmond homeowner owes $200,000 on a $400,000 home, refinances into a $260,000 loan, and takes $60,000 in cash. The cash-out refinance tax implications come down to two answers. The $60,000 is generally not taxable income, because it is borrowed money. Whether the interest on it is deductible depends on what you spend it on. I use $400,000 as a round figure for this example, and the worked example below explains how to check current city-wide prices.
Below: the proceeds rule, the interest deduction test, the full dollar example, a program comparison table, and the records worth keeping. Duane Buziak, NMLS #1110647, wrote this guide for general education. It is not tax advice, and your CPA should confirm how any of it applies to your return.
Contents
- Why Cash-Out Refinance Proceeds Are Generally Not Taxable Income
- The Use-of-Funds Test: When Cash-Out Mortgage Interest Is Deductible
- Worked Example: $60,000 Cash Out on a Median-Priced Richmond Home
- Cash-Out Refinance Tax Treatment Compared Across Loan Programs
- Other Tax Issues: Points, Home Equity Alternatives, and Future Sale Gains
- Records to Keep and How to Pre-Qualify Before You Refinance
- Talk to a CPA First, Then Run the Numbers
- Cash-Out Refinance Tax FAQ
Why Cash-Out Refinance Proceeds Are Generally Not Taxable Income
A cash-out refinance replaces your current mortgage with a larger one and pays you the difference. That difference is loan principal, and you owe it back with interest. Income is money you earn or receive without an obligation to repay, so borrowed funds are generally not reported on your return. The IRS explains how mortgage debt and interest are treated in Publication 936, Home Mortgage Interest Deduction, and nothing there treats loan proceeds as income.
Three situations get confused with each other, and only two of them can create a tax bill:
- Borrowed cash from a refinance: generally not taxable when received.
- Forgiven or cancelled debt: can be taxable income in some cases, such as when a lender writes off part of a balance you owed.
- Profit from selling a home: can trigger capital gains tax, though many sellers qualify for an exclusion discussed later.
Tapping equity is a borrowing event, not a sale and not a debt cancellation. The tax questions come afterward, from how you use the money and how you treat the interest.
Cash-out is available across several programs in the city of Richmond. Conventional cash-out loans follow Fannie Mae and Freddie Mac rules, with a 2026 conforming loan limit of $832,750 for a one-unit home (confirm the current figure at FHFA.gov). FHA and VA each have their own cash-out refinance options, and loans above the conforming limit fall into jumbo territory. The Consumer Financial Protection Bureau publishes plain-language material on how cash-out refinancing works and what it costs.
The program you pick changes your rate, mortgage insurance, and costs. It does not change whether the proceeds are taxable.
The Use-of-Funds Test: When Cash-Out Mortgage Interest Is Deductible
Interest on a cash-out loan is deductible as home mortgage interest only for the part of the debt that counts as acquisition indebtedness: debt used to buy, build, or substantially improve the home that secures the loan. IRS Publication 936 lays out this test, and IRS Topic 505 covers interest expense more broadly.
When you refinance, the new loan keeps its acquisition debt status only up to the balance of the old acquisition debt just before the refinance. Cash you take beyond that counts as acquisition debt only to the extent you spend it on the home. Cash used for other purposes is treated differently, and the interest on that slice is generally not deductible.
What qualifies and what does not
- Likely qualifies: a kitchen remodel, a new roof, an addition, or other work that adds value, prolongs the home’s life, or adapts it to new uses. This is a substantial improvement.
- Likely does not qualify: routine repairs such as patching a leak or repainting a room, which maintain the home rather than improve it.
- Does not qualify: paying off credit cards, funding tuition, buying a car, or building a savings cushion. The home is collateral, but the money did not go into the home.
The most common mistake is assuming all interest on a cash-out loan is deductible because the house secures it. Collateral does not decide the question; use of funds does.
Itemizing still has to make sense
Mortgage interest is deductible only if you itemize on Schedule A. If you take the standard deduction, you get no separate benefit from the interest. As of 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly, according to IRS inflation adjustments, and the cap on acquisition debt eligible for the deduction is $750,000 under current law. Tax law changes, so confirm both figures with the IRS or your CPA before you plan around them.
Many homeowners fall short of the standard deduction even with a sizable mortgage, which is why the next section puts actual numbers on it.
Worked Example: $60,000 Cash Out on a Median-Priced Richmond Home
Home values change monthly, so check the current city-of-Richmond median on Zillow’s Richmond home values page or in Virginia REALTORS market reports before running your own numbers. For this illustration I use a round $400,000 home value. These figures are an example only, not a quote, and the rate is a placeholder.
The sample loan
- Home value: $400,000
- Existing mortgage balance: $200,000, all of it originally used to buy the home
- Cash out: $60,000
- New loan: $260,000, or 65% of value
- Illustrative rate: 6.25% on a 30-year fixed
Principal and interest on $260,000 at 6.25% is about $1,601 a month. The same $200,000 balance alone would cost about $1,231 a month, so the $60,000 adds roughly $369 a month in principal and interest. Over the first 12 months, about $3,730 of the payments on that $60,000 slice goes to interest.
Scenario A: a kitchen and bath remodel
All $60,000 goes into substantial improvements. The interest on that slice, about $3,730 in year one, can potentially count as deductible home mortgage interest, along with the interest on the original $200,000 acquisition debt. That helps only if you itemize. A married couple filing jointly would need total itemized deductions above $32,200 (as of 2026) before the extra interest changes their tax bill at all. If they do clear that line and sit in the 24% bracket, the $3,730 could be worth roughly $895 in federal tax. In the 12% bracket, the same interest is worth about $448.
Scenario B: paying off credit cards
The same $60,000 pays off card balances. The loan, rate, and payment are identical, but the roughly $3,730 of first-year interest on that slice is generally not deductible, so the tax benefit from it is $0. The gap between scenarios is that $3,730 of potentially deductible interest, even though the monthly payment is the same. Card payoff can still make financial sense, because a 6.25% mortgage rate may sit well below card rates, but the tax side is a separate question from the savings side.
The deduction’s real value depends on three things: the amount spent on the home, your marginal bracket, and whether itemizing beats the standard deduction.
Cash-Out Refinance Tax Treatment Compared Across Loan Programs
The tax rules for proceeds and interest are the same whichever program funds the loan. What differs is the loan-to-value cap and the mortgage insurance or funding fee. The figures below are typical guideline levels as of 2026, and individual lenders may apply stricter overlays. Check current rules at fanniemae.com, hud.gov, and va.gov.
| Feature | Conventional Cash-Out | FHA Cash-Out | VA Cash-Out |
|---|---|---|---|
| Typical max loan-to-value (primary home) | 80% | 80% | Up to 100%, depending on lender overlays |
| Mortgage insurance or fee | Private mortgage insurance generally not required at 80% LTV or below; pricing adjustments apply | Upfront and annual FHA mortgage insurance premium | VA funding fee, with exemptions for some veterans (such as those with service-connected disability compensation) |
| Are proceeds taxable income? | Generally no | Generally no | Generally no |
| Interest deductible? | Only on the portion used to buy, build, or substantially improve the home, and only if you itemize | Same test | Same test |
| Insurance premium or funding fee deductibility | Separate question; confirm with a tax professional | Separate question; confirm with a tax professional | Separate question; confirm with a tax professional |
Whether mortgage insurance premiums or a financed VA funding fee affect your return depends on current law and your own situation, so ask your CPA rather than assuming.
Veterans in Richmond often have both a VA and a conventional cash-out path available, and total cost can differ meaningfully once the funding fee, rate, and loan size are all counted. Duane Buziak encourages you to Dare to Compare your options side by side before choosing a program.
Other Tax Issues: Points, Home Equity Alternatives, and Future Sale Gains
Points on a refinance
Points paid to refinance are generally deducted gradually over the life of the loan, not all in the year you pay them. Pub. 936 describes an exception: if part of the loan funds home improvements and certain conditions are met, the points tied to that part may be deductible in the year paid. If you refinance again or pay off the loan early, any remaining unamortized points can often be deducted at that time. Because the conditions are specific, have your CPA review the closing disclosure.
Cash-out refinance versus a home equity loan or HELOC
A separate home equity loan or HELOC faces the same use-of-funds test, so tax treatment alone does not favor one structure. The practical difference is that a second loan leaves your first mortgage and its rate untouched, while a cash-out refinance replaces the whole balance at today’s rate. If your current rate is low, that may matter more than any tax effect.
Cash out does not raise your cost basis
Your cost basis is roughly what you paid for the home plus the cost of capital improvements. Taking cash out raises your loan balance, not your basis. Only improvements add to basis, which can reduce taxable gain when you eventually sell. Many homeowners can exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, under the Section 121 home sale exclusion if they meet the ownership and use tests (see IRS Topic 701). Keeping improvement records matters even if you expect to stay under those limits.
The Virginia angle
Virginia’s individual income tax generally starts from federal adjusted income, but state treatment of itemized deductions has its own rules and can change. A Virginia CPA can confirm how your federal deduction flows through to your state return.
Records to Keep and How to Pre-Qualify Before You Refinance
If you want to claim interest on the improvement portion, the paper trail is your proof. Keep these:
- The closing disclosure from the refinance, showing the new loan amount, points, and the payoff of your old loan
- Form 1098 from your servicer, which reports the mortgage interest you paid each year
- Contractor contracts, invoices, and receipts for improvement work
- A running log that separates improvement spending from every other use of the cash
One simple habit helps: deposit the improvement funds into a dedicated account and pay contractors from it. Then the use of proceeds is documented without reconstructing it from memory at tax time.
How the process works with Duane Buziak
- Review your goals: how much cash you need, what it is for, and how long you plan to stay.
- Run a NoTouch Credit Pull soft-pull pre-approval, so you can see where you stand without a hard inquiry at the start.
- Compare cash-out options across programs, including the payment, mortgage insurance or funding fee, and total cost.
- Coordinate with your CPA on how the intended use of funds affects your return.
Eligibility varies by program and changes over time. As of 2026, conventional cash-out loans generally require a credit score of at least 620. FHA and VA minimums are set by individual lenders and commonly fall in a similar range, and debt-to-income limits also vary by program and underwriting findings. None of this is a promise of approval, since final terms depend on your full file, the appraisal, and current guidelines.
Talk to a CPA First, Then Run the Numbers
Cash-out proceeds are generally not taxable. Interest deductibility turns on how you use the funds and on whether you itemize. Spending on the home is where the deduction lives, and spending elsewhere is where homeowners most often overestimate it. Before you commit, ask your CPA how your own bracket and itemizing picture would treat the interest.
Whether you’re a veteran ready to use your hard-earned benefits or a homebuyer exploring your financing options, your path to homeownership starts with expert guidance you can trust. Connect with Duane today for a personalized consultation and discover the mortgage solution tailored to your unique goals in the Stafford County and Richmond area. You can also reach Richmond Home Loans by Duane Buziak directly at (804) 212-8663.