Is Reverse Mortgage Tax Deductible?
By Rob K. Blake
Reverse mortgages can be an ideal mortgage vehicle for seniors who need to solve major financial problems. With this type of loan, seniors can easily access the home equity or what mortgage folks call the “home savings account” they built over the years. Most important of all, you can tap this “savings account” without penalties like other savings vehicles and you will not risk losing ownership of your home either.
Some Basic Facts
Reverse home loans are available for seniors who are at least 62 years old and live in their primary residence. Remember, this a primary residence loan only. It won’t work on second homes or investment properties. It won’t work if you want to move into a retirement or assisted living facility.
When getting this loan, you have the option to choose different payment methods. You can receive a lump sum amount, monthly regular checks, or a line of credit. Repayment with interest will only be required if you sell your home, you move to another place permanently, or if you pass away.
The cash advances you get from this type of mortgage are not taxable. Your Medicare and Social Security benefits will not be affected by this loan. You have to note that reverse mortgage does not require you to surrender your title. You will still own the property as long as it is your primary residence.
The loan will become due when you sell the home or when you transfer your primary residence. If the home owner /borrower dies, then it must be repaid together with all accrued interests. The interest will be added to the payoff amount so when the heirs sell the home, the new buyer hopefully pays enough for the property to liquidate the loan in total. Most of the time the balance of the mortgage is substantially less than the sales price of the home, so the heirs actually get to share in the net sales proceeds of the house.
Tax Deductibility
The issue of tax deductibility is a bit confusing for those who want to take out a reverse mortgage. Remember that this loan is radically different from the usual conventional mortgage. You are not make monthly payments of principal and interest to the bank (the bank is paying you, remember), so the interest associated with this “backwards” mortgage is not tax deductible. It becomes deductible only when the loan is call due for any reason.
The upfront expenses and the interest are normally added to the loan. Basically, you are not paying for these items out of pocket. So according to the IRS, the expenses are not actually being paid, therefore no deduction. This is the reason why they can not become tax deductible. They can become deductible once the reverse mortgage matures or is call due and payable. Maturity of this loan could mean that the last borrower has died, moved into a retirement facility, or the property has been sold. The loan can be called due if you move permanently to another home. Of course, one always get another “backwards” mortgage on the new property as well since it now becomes the primary residence once there is enough equity.
Reverse mortgages are known by other names. It is also called as the home equity conversion mortgage or the reverse annuity mortgage. The best thing about these types of mortgage, regardless of the name you use, is that you are not required to produce documents about income history or credit rating. As long as you have the equity to your home and you are at least 62 years old, then you may qualify for the reverse loan.
Would you believe that hundreds of thousands of seniors are enjoying the benefits of a reverse loan? The loan can be used to pay for the needs of senior citizens. It is the best source of regular income for those who are already retired from productive work and have a ton of home equity they can use.
Rob K. Blake, home loan expert and author, educates mortgage shoppers on finding local providers by state like Rhode Island Mortgage Brokers and Lenders and provides reviews of national companies like Aurora Loan Services.
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