A refinance does not create a capital gain. Period.

The cash you collect at close merely is a “return of capital” or a return of cash previously invested in the mortgage, and is not includible as income.

Make sure you keep the closing statement on the refinance - and give it to your tax preparer next year. There will be several items to deduct on your next tax return.

You cannot be taxed on a loan. Until you actually sell the house, the value of the home is in question because the market will determine the actual value at sale time. Because of this fact, you cannot have capital gains as long as you own the property.

However, if when you go to sell the home, if you are then subject to capital gains, hopefully you haven’t already spent it. But that’s unlikely to be an issue, as the first $500,000 in gains is tax-free for a married couple who have lived in the home as their primary residence for at least 2 of the prior 5 years.

And considering that most of that money will actually go to capital improvements to the home, you’ll be increasing the cost basis of the home, limiting the actual gain when you do sell. Just be sure to keep your records of the improvements until you sell! I don’t know what counts as a capital improvement and what doesn’t, but when the time comes, a CPA will be able to answer those questions for you.