How to record a refinance and cash-out on a rental property in your books

What actually happens at a refinance closing

On closing day the new lender sends money. Most of it goes straight to the old lender to pay off the loan. Some pays the closing costs. Whatever is left comes to your LLC's bank account. Your bank statement shows one deposit, but your books need to show four different things: the old loan going away, the new loan arriving, the costs, and the cash.

The closing disclosure (or settlement statement) is your source document. It lists the new loan amount, the payoff of the old loan, the interest owed to the old lender up to the payoff date, each fee, and the cash to you. Every number in the entries below comes from that one page, so save it with the property's documents.

The entries, step by step

1. Take the old loan's payoff amount from the statement and remove the balance: debit the old mortgage account for the principal.
2. Any interest owed to the old lender up to payoff is ordinary mortgage interest: debit Mortgage interest.
3. Add the new loan: credit a new mortgage payable account for the full new loan amount. Keep it separate from the old one so the old account ends at zero.
4. Put the lender fees, title charges and appraisal in a Loan costs account (an asset) so you can spread them over the new loan.
5. Debit your checking account for the cash that actually arrived.

Example a made-up LLC owes $150,000 on its old mortgage and refinances into a $200,000 loan. The closing disclosure shows $500 of interest owed to the old lender, closing costs of $3,600 (lender fee $2,000, title $1,200, appraisal $400) and cash to the LLC of $45,900. Check: $200,000 less $150,000 less $500 less $3,600 is $45,900.

Debits and credits both total $200,000, so the entry balances. After it, the old loan account is zero, the new loan account shows $200,000, and the checking account is up by $45,900. Nothing hit rental income, because borrowed money is not rent.

What to do with the closing costs

The costs of getting a loan are not an expense in the year you pay them. IRS Publication 527 treats them as costs spread over the life of the loan, and it says some charges, such as commissions and recording fees to obtain the mortgage, are capital items that belong with basis instead. Read the rules in IRS Publication 527. Which fee goes where is a decision for your tax preparer, so book them in a holding account and let the preparer sort them at year end.

Example the $3,600 above is spread over a new 30 year loan, which is 360 months. $3,600 divided by 360 is $10 a month, or $120 a year. After the first full year, Loan costs shows $3,600 less $120, which is $3,480. The $120 is the yearly expense.

If you later pay off this loan early, ask your preparer about the part not yet used. A longer treatment of points and early payoff is in mortgage interest on a rental.

Where the cash-out goes matters

The $45,900 sits in checking. It is a liability you now owe, not an increase in profit. What you do next creates the next entry:

• Spent on the rental, such as a new roof: record it as the purchase it is. A roof is usually a capital improvement, so see tracking capital improvements by unit.
• Kept in the LLC as a reserve: nothing more to book. The money stays in the bank account.
• Paid to you: record an owner draw, an equity entry, as covered in owner draws vs distributions.
• Used to buy another property: book it in that property's own LLC, as a contribution, not in this one.

The reason to track this is tax. Publication 527 says that when you refinance for more than the previous balance, interest on the extra proceeds not used for the rental generally is not a rental expense. Your books should show what the extra money did so your preparer can apply the rule.

Example of the $45,900, the owner takes out $15,900 for personal use and uses $30,000 on the rental. The personal share of the $200,000 loan is $15,900 divided by $200,000, which is 7.95%. If the year's interest is $12,000, a simple split puts $954 as non-rental and $11,046 on Schedule E. Your preparer applies the IRS rules for tracing borrowed money, which can give a different split, so treat these numbers as an illustration.

Three checks after you record it

• The old loan account is exactly zero.
• The new loan balance matches the new lender's first statement, less any principal paid since.
• The checking balance reconciles to the bank, as in bank reconciliation for a rental property.

The first payment on the new loan is split into interest, principal and escrow exactly as in recording a mortgage payment. If the new loan creates an escrow account, the starting escrow deposit on the closing disclosure goes to an escrow asset, not to an expense.

How DoorKeeping handles it

In DoorKeeping each property has its own LLC books with its own mortgage account, so the payoff and the new loan can be entered against the right property. Ask Claude or ChatGPT to read the closing disclosure and propose the entries, then approve them with one tap. Rent stays in your own bank: tenants pay you directly and DoorKeeping never holds it. Expense accounts map to Schedule E lines, and DoorKeeping does not give tax advice, so check the loan cost and interest treatment with your tax preparer.

Sources

1. IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
2. IRS, Publication 535, Business Expenses, read Oct 30, 2026

Questions

Is cash-out refinance money income to my rental LLC?

No. It is a loan you have to repay, so it goes to a loan liability, not to rental income.

Are refinance closing costs deductible right away?

Generally not all at once. Publication 527 describes loan costs as spread over the life of the loan or added to basis, depending on the item. Ask your preparer to sort them.

Can I deduct all the interest if I took cash out?

Not necessarily. Publication 527 says interest on extra proceeds not used for the rental generally is not a rental expense, so track what the cash was used for.