Refinancing is a routine part of real estate investing. Investors refinance to lower their rate, pull out equity, or restructure debt. One question comes up again and again: does refinancing change my depreciation?

The short answer is no. A refinance does not change your depreciable basis, alter your cost segregation results, or reset your rental property depreciation schedule. Your deductions continue exactly as before.

Refinancing can still multiply your tax savings, but only indirectly. The cash it frees up can fund your next acquisition, and each new property qualifies for its own cost segregation study. This article covers what a refinance does and does not change, how cash-out proceeds fund new studies, and how to time a study around a refinance.

Refinancing Does Not Change Your Depreciable Basis

Your depreciable basis equals the original purchase price, plus capital improvements, minus land value. You set that number when you buy. It changes only when you add improvements or make specific basis adjustments, as IRS Publication 527 explains.

A refinance is a loan transaction. You replace one mortgage with another. The IRS does not treat it as a sale, exchange, or taxable event. Your basis does not move.

This means:

• A bigger loan does not increase your basis. Pulling out $100,000 in equity adds nothing to your depreciable basis.
• A lower rate does not affect depreciation. Your loan terms and your asset classifications are separate.
• Refinance costs do not increase basis. Loan costs are amortized over the loan term, not added to the building's depreciable basis.

Did you complete a study before refinancing? Your schedule stays intact. The reclassified components keep depreciating on their 5-, 7-, 15-, or 27.5-year schedules. The refinance has no effect.

Does my cost basis change when I refinance?

No. Your basis for depreciation comes from your original acquisition cost, plus improvements, minus land. A refinance changes your debt, not your basis. The two run on separate tracks.

What a Refinance Actually Affects

A refinance does not touch depreciation. It does change other parts of your tax picture.

Mortgage interest deduction. A new rate changes your annual deductible interest. A lower rate means less interest. A cash-out refinance with a larger balance means more interest, but only the portion tied to rental, business, or investment use may be deductible. Under the interest tracing rules, interest follows how you use the proceeds, not the property securing the loan: proceeds used for the next rental are deductible against that rental, while proceeds used personally are nondeductible personal interest.

In the example below, the interest on the $150,000 used as the down payment on the second rental is reported with that property, while the interest on the $450,000 used to pay off the original mortgage remains tied to the first property. Keep cash-out proceeds in a separate account and pay the next property's down payment directly from it; commingling the funds with personal money can create allocation problems. Proceeds left idle in an account are generally treated as investment-use debt until spent.

Cash flow. Lower payments free up operating cash. A cash-out refinance delivers a lump sum. Neither changes depreciation. Both affect your returns and your planning flexibility.

Property value. A new appraisal may show a higher value. This does not change your depreciable basis. The IRS bases depreciation on your historical cost, not the current appraised value.

Closing costs. Points, origination fees, lender's title insurance, appraisal fees, mortgage recording fees, and similar charges are costs of obtaining the loan. They are capitalized and amortized over the term of the new loan: amortized points are reported as interest, while the remaining loan costs are reported as amortization. None increase your depreciable basis or the reclassified portions of your study. Escrow deposits for taxes and insurance are not costs at all; they remain your money while held by the servicer.

Old loan costs. If the new loan is from a different lender, you generally deduct the remaining unamortized points and loan costs from the old loan in the year it is paid off. If you refinance with the same lender, the IRS position is that the unamortized balance continues to be amortized over the term of the new loan.

Your existing study and depreciation schedules survive a refinance without adjustment.

The Cash-Out Refi Strategy: Funding New Studies

A refinance does not create deductions on its own. The cash it produces can fund purchases that do.

The BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) runs on this idea. Investors buy a property and raise its value through renovation. They stabilize it with tenants, then refinance to pull out equity. They use the proceeds to buy the next property. Each new property qualifies for its own study.

Here is a simplified example. An investor owns an $800,000 rental with a $450,000 mortgage. After improvements, it appraises at $800,000. The investor refinances at 75% loan-to-value, a new $600,000 loan. After paying off the $450,000 balance, the investor nets $150,000 in cash.

That $150,000 is not taxable income. It is borrowed money secured by the property's equity.

The investor puts the $150,000 down on a $500,000 rental, a 30% down payment. First, exclude land. At an 18% land allocation, the depreciable basis is $410,000. A study then reclassifies about 28% of that basis, roughly $114,800, into 5-, 7-, and 15-year property.

Here is where current law matters. The One Big Beautiful Bill Act restored 100% bonus depreciation permanently for qualified property acquired and placed in service after January 19, 2025. Because the reclassified components have a recovery period of 20 years or less, they qualify. The investor can deduct the full $114,800 in year one.

At a 37% marginal rate, that $114,800 deduction is worth up to $42,476 in first-year tax savings. Two conditions apply. First, the figure assumes the top federal bracket. Second, and this is critical, you must be able to use the loss. Under the passive activity loss rules, rental losses are generally passive. You can offset them against W-2 or other active income only if you qualify as a real estate professional, use the short-term rental exception, or have passive income to absorb them.

Meanwhile, the original property's study and schedule continue untouched. The investor now runs two properties producing accelerated depreciation. Each refinance can fund the next acquisition, and each acquisition earns its own cost segregation ROI.

One caution for the eventual exit: accelerated depreciation increases depreciation recapture when you sell. Faster deductions now can mean a larger recapture bill later, so weigh the timing with your CPA.

When to Order Your Study Relative to a Refinance

Investors often ask whether to complete a study before or after refinancing. For depreciation, the timing does not matter. For planning, it does.

Before refinancing. Your study does not affect your appraisal, loan approval, or rate. Lenders underwrite to the property's value and your income, not your depreciation schedule. Ordering the study first captures accelerated deductions sooner.

After refinancing. The study still applies to your original basis. Nothing about the refinance changes what the engineer can reclassify. If you refinance first and study later, you can file a look-back study and claim missed deductions through a Form 3115 accounting method change. This produces a Section 481(a) catch-up adjustment, with no amended returns required, per the IRS Form 3115 instructions.

The best timing. Order your study around your tax year, not your refinance date. If you close a refinance in October, align the study with year-end planning rather than the closing date.

Own a property for years with no study? A refinance is a natural prompt to revisit your strategy. The added cash flow pairs well with the catch-up deductions a study can unlock.

Do I pay taxes on a cash-out refinance?

No. Cash-out proceeds are loan funds, not income. You repay them, so the IRS does not tax them when you receive the money.

Key Takeaways

• A refinance does not change your depreciable basis. Your basis comes from the original purchase price and capital improvements, minus land.
• Your existing cost segregation study survives a refinance. No adjustments are needed.
• Cash-out proceeds are not taxable income. Use them to fund new acquisitions with their own studies.
• Loan costs are amortized over the loan term. They do not increase your building's depreciable basis.
• You can claim 100% bonus depreciation on qualified components placed in service after January 19, 2025, but only if the passive activity loss rules let you use the deduction.
• Time your study to your tax year, not your refinance date. The two are independent.

Ready to see the numbers on your own portfolio? Get a free proposal to evaluate cost segregation on the property you own now and the one you buy next.

‍