The cash itself is not income
Loan proceeds are not taxable, so a cash-out refinance lets you pull equity out of a rental tax-free. This is why refinancing is a common way to access appreciation without triggering capital gains the way a sale would.
Interest follows the money
The deductibility of the new interest depends on how you use the proceeds, under the interest tracing rules. Use the cash to buy or improve another rental and the interest is generally deductible against that activity. Use it for personal purposes and that portion of the interest may not be deductible.
Watch your basis and recapture
Refinancing does not increase your depreciable basis — you still depreciate based on your original cost. And because you have pulled cash out without paying tax, a future sale can produce tax that exceeds your remaining equity if the loan balance is high, sometimes called a phantom gain.
Frequently asked questions
Is cash-out refinance money taxable?
No. Loan proceeds are not income, so the cash is tax-free when you receive it.
Can I deduct the new interest?
It depends on how you use the proceeds under the interest tracing rules. Money reinvested in the rental business is generally deductible; personal use is not.
Does refinancing raise my depreciation?
No. Depreciation is based on your original cost basis, not the new loan amount.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.