Reverse Mortgage Tax Planning
Using your reverse mortgage for tax planning.
May 23, 2011
As discussed in our tax column, interest on a reverse mortgage can be written off in the year it is actually paid, not in the year it accrues. Because no payments are required on a reverse mortgage the reverse mortgage lender does not send a 1098 mortgage interest statement for borrower income tax write offs. In fact, the point of a reverse mortgage is to not have to make monthly payments to any reverse mortgage bank or lender. However, a reverse mortgage does not have any prepayment penalties, so a borrower may choose to make an interest payment anytime they wish. So why would anyone choose to make a payment?
Tax planning is the answer. Using the reverse mortgage this way will only be beneficial to those who need tax deductions from time to time. To them a reverse mortgage a great tax saving tool that will likely be used for generations. The tool can be best used on years where a borrower’s income is higher than desired. For example, let's say a borrower is just over the 30% tax bracket and a reduction in income of $2000.00 will reduce the income enough to get the borrower to a lower tax bracket. A wise reverse mortgage borrower could choose to make an interest payment of a few thousand dollars on the reverse mortgage to gain that tax write off. In some cases this may make a large difference in the amount of income taxes paid.
The big benefit here is that on years this write off is not needed no payments need to be made. This creates ultimate flexibility for the borrower. The interest accrued on the years no payment is made will be added to the balance. All that interest from all the years the reverse mortgage has been in place is available as a tax write off for later years, giving a tremendous amount of flexibility for planning tax write offs down the road. While one reverse mortgage program differs from another in the way the money is given to the borrower, they all carry a common benefit with regard to tax planning. However the HECM reverse mortgage lines of credit may accrue less interest depending on the reverse mortgage plan selected by the borrower.
There is also a potential benefit for those who decide to move after taking a reverse mortgage. Once the home is sold and the reverse mortgage is paid off by the sale proceeds, all the unpaid interest becomes deductible in the year the home was sold. The tax savings may be help when considering money needed for down payment on a new purchase, or if no new home is purchased the interest write off is a nice offset to potential capital gains tax. Remember the reverse mortgage purchase program is available to those who wish to move.
Understanding the options available can help you utilize your reverse mortgage to the maximum benefit possible. For more information please contact us, or use our online tools including the reverse mortgage calculator to learn more about how a reverse mortgage can improve your lifestyle as well as learning the reverse mortgage pros and cons, when a reverse mortgage is bad, and when a reverse mortgage is good.
You can always call your reverse mortgage adviser for more assistance at 855-473-8377 or check out our reverse mortgage guide. Reverse My Mortgage is here to help you get the answers you need.
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