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Deductions & credits
There are a few rules on what you can and cannot deduct when you take a cash-out refinance. Though you can use the money for nearly anything, you’ll need to use it for a capital home improvement in order to deduct your interest. IRS Publication 936 covers this in a little more detail. As a general rule, you need to make some kind of improvement to your home that increases the property’s value to deduct your interest. You usually can’t deduct the interest if you use the money for anything else, like paying off credit card debt or taking your dream vacation.
For tax years 2018 through 2025, you can only deduct the interest from the amount of your loan that was used to buy, build, or improve the home that it’s secured by.
If you’ve ever used part of this loan to pay for things other than this home, you cannot deduct the interest from that amount of the loan, even if the transaction didn’t take place this year.
Changes in tax law went into effect on January 1, 2018 with the Tax Cuts and Jobs Act (TCJA) that significantly affected the tax deduction for interest on a mortgage refinance loan. The rules aren't as generous as they were in 2017, so you might want to bring yourself up to date before you consider refinancing your mortgage unless you have a pressing need for the money.
Don’t worry, we’ll help figure out what amount of interest you can deduct.
Examples of common ways you might have used this money not on your home include:
- Making a down payment on a different home
- Funding improvements on a different home
- Making a payment on a different loan or debt
- Having miscellaneous large purchases
Example: John took out a home equity line of credit on his home on Tuberose Street for $40,000. He used $25,000 to remodel his kitchen and bathrooms in his Tuberose Street home, and $15,000 as a down payment on a second house on Snowdrop Lane. He can only deduct the interest he paid on $25,000 he used to improve his Tuberose Street home.
The majority of these changes are set to expire at the end of 2025 when the TCJA sunsets unless Congress reauthorizes the Act or renews certain aspects of the legislation.
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