A Question on Tax Implications of Mortgage Refinancing

Real expert Bob Bruss recently answered a handful of questions from readers of The Washington Post. Here’s one related to refinancing a mortgage:

Q: We just refinanced our condo, receiving part of our equity in cash. Is the money we received taxable?

A: No. When you go through a mortgage refinance, taking out all or part of your home equity in cash, you owe no tax on the money. Borrowed cash must eventually be repaid, whether you do so over the life of the mortgage, such as 20 or 30 years, or when you sell the condo and pay off the mortgage balance in full.

If your new refinanced home loan exceeds your house’s adjusted cost basis (as it probably does) - such as a $200,000 mortgage on a condo you bought for $150,000 several years ago - that is a “mortgage in excess of basis.” There is no tax on such an “excess mortgage” at the time of refinancing.

When you sell your condo, however, you have an excess mortgage when that $50,000 cash-out money becomes part of your resale profit, even though you already received that $50,000.

Of course, when you sell - and if your principal residence capital gains sale profit is less than $250,000 under Internal Revenue Code 121 - you owe no capital gains tax if you owned and occupied the home at least 24 of the last 60 months before its sale.

That exemption includes any excess mortgage amount from your cash out refinancing.