Reverse Mortgage and Taxes
Reverse Mortgage and taxes
One of the greatest concerns for seniors considering getting a reverse mortgages is what its impact will have on their taxes. There are several points that need to be considered, including the impact of a reverse mortgage taxable income, the ability to use mortgage interest deductibility on personal income tax refunds, and any impact of the reverse mortgage on property taxes.
First- the good news. Income received from the loan proceeds is not considered taxable income. A common myth is that proceeds from reverse mortgages are considered income to the IRS, which it is not. Just as with any other type of mortgage the funds you receive from a reverse mortgage is money borrowed and thus not considered earned income. As a result there is no increased income to report on your taxes which is also why a reverse mortgage does not harm your Medicare benefits. As a result you can enjoy the benefits of a reverse mortgage without giving part of the money to Uncle Sam. (it is important to note that a reverse mortgage may impact Medicaid benefits. While this only affects a few individuals we suggest calling us if you have questions on this issue)
Now -for the bad news. Mortgage interest tax deductions may be claimed in the year that the interest is actually paid, not in the year it accrues. As a result it is not common for mortgage interest accruing on a reverse mortgage to be tax deductible each year. It is all deductible when the mortgage is paid off either due to the borrowers passing away, moving, or paying off the mortgage. If for any reason you choose to make a payment on the reverse mortgage (payments are not required on a reverse mortgage so this would strictly be you making a payment because you wanted to) then the interest associated with that payment would become tax deductible for that year. In short, you should not count on using mortgage interest as a tax deduction unless or until you make a payment to the lender. Most borrowers stay in their homes the rest of their lives so they are not required to ever make a payment on the mortgage. As a result the heirs to the property will pay less of an estate tax because the payoff on the mortgage will include the interest accrued on the mortgage, thus leaving less income for them to be taxed on.
Finally, with regard to property taxes- the reverse mortgage itself has no direct impact on the amount of property taxes you pay each year. However, if home improvements are made the value of the property may increase. This increase could result in a higher property tax assessment- something that will vary depending on your location and the local tax laws where you live. It is also possible that your appraisal may come in lower than your current taxed value. In this case you may use the appraisal to contest the property value and work on lowering your property taxes with your local government. In short, the reverse mortgage will not directly impact your property taxes; however they may go up depending on what you do with the money, or down if the appraisal supports a lower value.
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