Refinancing does not affect depreciation
Depreciation is based on your cost basis in the property — what you paid, plus improvements — not on your equity or your loan balance. When you refinance, neither of those changes. The purchase price and capital improvements stay the same; so does the annual depreciation deduction. A cash-out refinance might put $100,000 in your pocket, but it does not reset the depreciation clock or change the annual deduction.
Cash-out proceeds are not taxable income
The cash you receive in a cash-out refinance is loan proceeds — debt you will repay with interest — not income. It is not reported on your tax return as income, and since it does not add to your cost basis in the property, it also does not increase future depreciation.
What does change: the interest deduction
Refinancing changes your mortgage interest deduction because your loan balance and rate change. Mortgage interest on a rental property is generally fully deductible against rental income on Schedule E. If you pulled cash out for personal purposes (a vacation, a car), the interest on that portion may not be deductible as rental expense — the IRS traces the use of refinanced proceeds. Funds used for the rental property (repairs, improvements, down payment on another rental) generally retain rental deductibility.
Frequently asked questions
Does a cash-out refinance reduce my depreciation deduction?
No. Depreciation is based on your cost basis, not your equity or loan balance. A refi leaves both unchanged.
Is the cash from a cash-out refi taxable?
No — it is loan proceeds, not income. You will repay it with interest over the life of the new loan.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.