Second Mortgage

There will be a time when you may wonder if you need to report the equity “cash out” from mortgage refinance as income?

You do your own taxes every year, but this year you may have this question. Suppose you just refinanced your mortgage recently. And you find out that you have a good amount of equity.

So you decid to “cash out” some of your equity to help pay off some outstanding debts including car loans, student loan, credit card balance.

And you still manage to save some amount to keep it in your saving account. As a known belief that the government tries to take a piece of everything. But you know that this is your money and unlike wages. So what do you do in this case ?

The answer is NO! You don’t have to report it. You only report the equity on your home when you plan to sell it. Then, you subtract your total costs from your home from the selling price to figure your profit on the sale.

If you are single and have owned your home for two years or more, the first $250,000 is not taxable income. If you are married, the first $500,000 of profit is not. Any amount above and beyond that amount or if you have not lived in your home as your primary residence for more than two years, all profit is deductible.

So you didn’t sell your house, or an interest in your house, to the lender. Instead, you borrowed additional money from the lender on the security of your house, most likely because of a combination of factors that resulted in increasing your equity in the house.

Firstly, an increase in the market value of the house, as shown by an updated appraisal, and secondly, a decrease in the outstanding debt secured by a mortgage on the house because you’ve been paying down the principal of the original loan.

Those two factors, or others having the same effect, would result in an increase in the loan value of your house — that is, an increase in the amount a lender would be willing to lend on the strength of a mortgage on the house.

The bottom line is that the money you received in the refinancing is additional borrowed money that was lent to you on the security of the original mortgage on your house. Taxable income does not include borrowed money except in the rare case when the debt is forgiven by the lender.

Moreover some may tell you that if you believe that the money you received in the refinancing is your money, and not borrowed money, try not paying it back to the lender and see what happens. But on the larger scale, you don’t have to report it.