Cash-Out Refinance Accounting for Rental Property Owners: Booking the Payoff, Amortizing Loan Costs, and Why the Proceeds Are Not Income

A cash-out refinance on a rental property is a loan against your home equity, not a sale, so the cash you receive is not taxable income the year you get it. That distinction drives every cash-out refinance rental property taxes question that follows, from booking the old mortgage payoff to keeping your Real Estate Accounting clean afterward.

By REA Team, Property Management Experts

The IRS taxes income, and a loan is not income. When you close a cash-out refinance, the new lender pays off your existing mortgage and wires you the difference in cash, secured by real estate you already own. It does not appear on your Schedule E or your 1040 as revenue. Your rental income keeps flowing through your books the same way it always has; the refinance sits on the balance sheet as a liability, not on the income statement as revenue.

Where owners get tripped up is assuming a large deposit must be reportable somewhere. It is not, provided the transaction is genuinely a refinance, a new mortgage secured by the same property, rather than a sale or an exchange.

Do You Pay Capital Gains Tax When You Cash-Out Refinance a Rental Property?

No. Capital gains tax applies when you sell or dispose of the property, not when you borrow against it. Cash-out refinances change your loan balance and equity position, but do not trigger a taxable event, since you still own the property afterward; capital gains enter the picture only at sale, driven by sale price and cost basis, not your mortgage balance.

Does a Cash-Out Refinance Get Reported to the IRS or Trigger a 1099?

You will not receive a 1099 for the cash you pull out, because the IRS does not consider loan proceeds income. You will typically see a Form 1098 reporting mortgage interest paid across the year and a settlement statement from closing, but neither reports taxable proceeds. Keep your closing disclosure and bank statements from the transaction; your CPA will need them to substantiate the new mortgage balance and the payoff.

On closing day, two loans exist for a moment: the existing mortgage being paid off and the new mortgage taking its place. Your books need to reflect both movements in the same entry, or your mortgage balance will be wrong on every report until someone catches it.

The payoff is a debit to the old mortgage payable account for its full outstanding balance, funded out of the new loan proceeds rather than your operating cash. If the old loan carried an escrow balance, that balance is refunded separately and needs its own line; do not net it into the payoff figure or your escrow account will not reconcile at year end.

What Happens to the Unamortized Loan Costs From Your Old Mortgage When You Refinance?

Closing costs and points on the old mortgage were capitalized as an asset and amortized over its term, not deducted all at once. Paying that loan off early, through a sale or a refinance, ends that schedule, and in most cases whatever balance has not yet been amortized gets written off as a deduction in the year you pay it off, rather than carried forward onto the new loan. If you are refinancing with the same lender, confirm the treatment with your CPA first, since that case is handled differently in many situations.

Cash-out refinance closing costs, including origination fees, underwriting fees, and points, are not an immediate deduction in the year you pay them. They are capitalized as an asset and amortized in equal amounts over the life of the new loan, the same way the original acquisition loan costs were, under the rental property expense rules in IRS Publication 527. A refinance that costs several thousand dollars in fees on a thirty-year loan produces a small annual deduction, not a lump sum.

Can You Deduct Refinance Points on a Rental Property the Same Way as on a Primary Residence?

No. A primary residence carries a narrow exception letting a homeowner deduct points in full in the year of purchase under specific conditions, but that exception does not extend to rental property or to a refinance on a primary residence. Points on a rental property cash-out refinance amortize over the loan term like any other closing cost, with no shortcut to an immediate write-off.

Interest on a cash-out refinance is deductible against your rental income to the extent the loan is secured by the rental property and the proceeds are used for the rental activity or another investment or business purpose. The rule is tracing: the IRS follows how you use funds from the refinance, not what the loan is called. Use the proceeds to acquire another rental, cover repairs, or fund the business, and the interest tied to that portion is deductible. Pull cash out for a personal purpose, such as paying off a credit card unrelated to the business or funding other personal debt, and that portion becomes non-deductible personal interest, even though the loan is secured by a rental property.

This is why lenders and CPAs push owners to keep a clean paper trail: a commingled account that mixes personal debt consolidation with rental proceeds turns a simple deduction into a multi-year documentation problem.

Refinancing does not change your rental property's cost basis or its depreciation schedule. Cost basis is set by what you paid for the property plus qualifying improvements, and depreciation runs on that figure over its recovery period regardless of how the property is financed along the way. A cash-out refinance changes your loan balance and interest expense; it does not touch the depreciation line on your tax return.

Where a refinance does interact with depreciation is indirectly, through cash flow. Pulling home equity out to fund a renovation adds to your basis for the portion spent on qualifying improvements, which in turn adds to what you depreciate going forward.

How Do You Journal Entry a Cash-Out Refinance in Your Bookkeeping?

The entry has four moving pieces, and missing one causes a mortgage balance to be off by exactly the closing costs a few months later.

• Credit the new mortgage payable account for the full new loan amount.
• Debit the old mortgage payable account to zero it out, funded from the new loan.
• Debit a deferred financing costs asset account for the new closing costs and points, amortized over the loan term.
• Debit cash for the net proceeds actually wired to you, after the payoff and costs are netted out.

Whether your books live in QuickBooks or a property management platform, the logic does not change: the new mortgage replaces the old one dollar for dollar, and only the leftover cash and new closing costs touch anything outside the liability accounts. Timing often comes down to whether your file runs on accrual versus cash basis accounting, since accrued interest and prepaid escrow move differently through each. Skip that entry and expense the closing costs immediately instead, and your financials will overstate this year's expenses while understating them for the rest of the loan term.

Do you have to pay taxes on cash-out refinance money from a rental property?

No. Cash-out refinance proceeds are loan funds secured by the property, not rental income, so they are not taxable the year you receive them. Your rental income and expenses continue to be reported normally on Schedule E.

What is the maximum LTV lenders allow on a cash-out refinance for a rental property?

Lenders generally set a lower maximum LTV on an investment property cash-out refinance than on a primary residence, since a non-owner-occupied loan carries more risk. The exact ceiling varies by lender, loan program, and your credit score, so confirm the current number with your loan officer before assuming how much home equity you can pull out.

How soon can you cash-out refinance a rental property after buying it?

Most lenders require you to have owned the property for at least six months before they will approve a home cash-out refinance, sometimes longer depending on the loan program and how the purchase was originally financed. Check the seasoning requirement with your lender before applying.

Does it matter what the funds used from a cash-out refinance go toward?

For the loan's tax status, no, it is not income regardless of destination. For your interest deduction, yes: the IRS traces how the funds are actually spent, and only the portion used for the rental activity or another investment or business purpose produces deductible interest.

Are interest rates on a cash-out refinance different from a standard rate-and-term refinance?

Cash-out refinance rates typically run a bit higher than a standard rate-and-term refinance's, because pulling equity out in cash increases the lender's risk. Refinance rates fluctuate with the broader market the same as any mortgage rate, and the gap depends on your credit score and loan-to-value ratio.

If you would rather hand the payoff entry, the amortization schedule, and the depreciation tie-out to someone who does this daily, Lets Connect and we will walk through your portfolio on a quick call.