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What is the tax treatment when I refinance a property?

Refinancing a rental property is not a taxable event. You receive money, but that money is a loan, not income. The IRS does not tax loan proceeds because you have an obligation to repay them. This applies whether you are doing a rate-and-term refinance to improve your interest rate or a cash-out refinance to access equity.

Cash-out refinancing can feel like you are realizing a gain because you walk away with money. But you are not selling anything. You are borrowing against equity you have built. The cash itself is not taxable, though how you use it can affect what is deductible going forward.

Interest deductibility depends on how you use the loan proceeds. If you refinance a rental property and use the funds to improve that property or acquire another investment property, the interest on the new loan is generally deductible against rental income. If you use cash-out proceeds for personal expenses, the interest attributable to that portion typically is not deductible as a business expense. Tracing rules matter here, and tax advisory and planning before a refinance can help you think through how to use the proceeds in the most tax-efficient way.

Points and fees paid on a refinance are handled differently than on a purchase. When you buy a property, points may be deductible in the year of purchase under certain conditions. On a refinance, points and loan origination fees are typically amortized over the life of the new loan. If you refinance again before the loan term ends, the unamortized balance from the prior refinance can usually be deducted at that point.

Your basis in the property does not change when you refinance. Basis is determined by your acquisition cost plus capital improvements, minus any depreciation taken. Loan balances have no effect on basis. This matters when you eventually sell, because your gain is calculated based on basis, not based on how much you owe.

From a bookkeeping standpoint, a refinance needs to be recorded properly. The old loan gets paid off and removed from your books. The new loan is recorded at its face amount. Any cash received in a cash-out refinance increases your bank balance but does not flow through income. Points and fees should be set up as prepaid expenses and amortized monthly over the loan term. Working with a firm that specializes in real estate investor accounting ensures these details are captured correctly from the start, with your interest expense tracked properly and documentation ready when you need it.

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More Questions

How much does real estate bookkeeping cost?

Real estate bookkeeping pricing depends on the number and types of assets you own and the scope of work involved. At Rock Real Estate Services, monthly bookkeeping starts at $500 and scales from there based on your portfolio.

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How do I switch from my current bookkeeper?

Switching bookkeepers is a routine process. We review and clean up your existing books, set up our systems and integrations, and take over the monthly work. Behind or messy books are completely normal at handoff.

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Who actually does my books day to day?

Your books are handled by Matthew Rodrigue and a dedicated team working under his direct oversight. Matthew stays involved throughout your engagement and knows your portfolio personally. The firm's in-house CPA handles returns and K-1s.

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What is a 1031 exchange and what are the deadlines?

A 1031 like-kind exchange lets real estate investors defer capital gains taxes by reinvesting sale proceeds into another investment property. You have 45 days to identify replacement property and 180 days to close, using a qualified intermediary to hold the funds.

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How do I handle accounting for a ground-up development?

Development accounting tracks all costs in work-in-progress until the project is complete. You capitalize hard costs, soft costs, and carrying costs to the project, track draws against the construction loan, and compare actual spending to budget by category.

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How are distributions calculated in a syndication?

Distributions are calculated against the waterfall in your operating agreement and each investor's capital account. The preferred return is paid first, then remaining cash follows the profit splits. Each distribution is documented against the investor's ownership percentage and capital account balance.

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Rock Real Estate Services is a boutique accounting firm serving real estate landlords, investors, operators, and brokerages nationwide. Bookkeeping, tax, advisory, and CFO services are all handled under one roof, with direct access to founder Matthew Rodrigue, an industry expert who leads every engagement.

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