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Taking equity out of a property by refinancing it is NOT income and is not reported on an income tax return. You took out a loan.
Money that you borrow is never taxable, whether used to buy property or put in your pocket, because you have promised to pay it back.
However, if the loan is ever canceled of forgiven (in bankruptcy or some other reason) then the remaining balance does become taxable.
Borrowed money is not your money. It never was, is not now, and never will be. Therefore borrowed money is never reported on any tax return.
Now a percentage of the interest will be a SCH E deduction, but not all of it. The interest paid on the outstanding balance of the original mortgage at the time you refinanced can be claimed as a SCH E deduction, and that's it basically. Here's how this works.
- Took out loan in 2010 to purchase property. Put $20K down and the loan is for $80K.
- In 2020 you owed $50K on the loan and refinanced for $100K - meaning you "cashed out" $50K after paying off the remaining $50K balance on the original loan. You did *NOT* use any of the cash out money to improve the rental property. You can only claim 50% of the interest paid on the refinanced loan on the SCH E. That's because your loan balance before the refinance was $50K. So you can only claim the interest on half of the outstanding balance on the new loan, for the life of the loan so long as the property securing the loan remains rental property.
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