In a cash-out refinance, the money that you take out will not be taxable itself. It's a loan. You don't pay tax on money that you borrow. But you will not be able to deduct all of the interest on the refinanced loan. You can only deduct the interest on the portion of the loan that you use to "buy, build, or substantially improve" your home. That means you can only deduct the interest on the amount that is equal to the current balance before the refinancing, unless you use some of the additional money for "substantial" improvements to the home. See IRS Publication 936, Home Mortgage Interest Deduction, for the details.
