When you have built up equity in your home, you can use that value to get a cash-out refinance. This gives you the money you need to work on home improvement projects, consolidate your debt and so much more. However, you may be curious about the impact cashing out on a refinance can have on your taxes. As a result, mortgage lenders in Atlanta will explain how a cash-out refinance affects your filing and the ways it can be used to make it tax-deductible.
At BrightPath, we use our comprehensive understanding of refinancing to save you time and money.
What is a Cash-Out Refinance?
According to mortgage lenders in Atlanta, when you get a cash-out refinance, you replace your mortgage with a new loan that has a higher balance than your existing one. The difference in these amounts is then given to you in cash that you can use for anything including consolidating debt and pursuing home improvement projects.
How Does a Cash-Out Refinance Affect Taxes?
In the eyes of the IRS, a cash-out refinance is not classified as income because it is a loan with interest that must be repaid over time. So, when filing your taxes, you do not need to claim it as income on your forms. However, there are restrictions on what it can be used for to make it tax-deductible. It is only deductible when utilized for improvement projects that increase the value of your home.
Making Your Cash-Out Refinance Tax-Deductible
Mortgage lenders in Atlanta suggest making capital home improvements, creating a home office or repairing a rental property to make your cash-out refinance tax-deductible. Capital home improvements are any additions or updates that transform your home to appeal to a new market or improve its equity and longevity. This can include renovations to add swimming pools or bedrooms, replacing windows and central heating units, installation of home security alarms and more. It is important to note that home repairs do not fall under this category – only new projects.
If you use your cash-out refinance to create a home office, it is a capital improvement that you can deduct on your taxes. If you are self-employed and run your business out of that office, you may also be eligible for additional tax benefits. However, which deductions will work best for you are determined by the size of the office because it is based on square footage. For offices under 300 square feet, a simplified deduction would be better than a regular deduction because a larger office size is factored into the cost of your overall mortgage, which could decrease your savings.
If you own a rental property, any type of repairs you make to it using a cash-out refinance can be tax-deductible because the money you make from renting is considered personal income by the IRS. Also, any insurance payments, interest or closing fees can be deducted as a business expense from your personal income.
When You Ask, the Mortgage Lenders at BrightPath Answer
The mortgage lenders at BrightPath understand the intricacies of how a cash-out refinance can affect your taxes. If you are considering using one to improve your home equity, you can lean on their expertise to make the right choices to save you money on your filing.
Contact us today to schedule your free consultation.
At BrightPath, we provide convenient and easy cash-out refinancing that is tailored to meet your every need.
DISCLAIMER: The mortgage lenders at BrightPath are not tax professionals. Consult with a CPA to determine the best tax plan for your individual circumstances.
