Mar 22 2008
Reverse Mortgage Tax Consequences
A common question among seniors is how the reverse mortgage affects their taxes. As always, you should consult your professional tax adviser to get iron clad answers - and I am not a tax advisor. So with the disclaimers out of the way, we think that you'll find the following to be straight-forward and logical.
The money that you get from a reverse mortgage is not taxable. Why? Reverse mortgage money is not income as far as the tax man is concerned. The money coming in from a reverse mortgage is already your money. It was just tied up in your home equity. Call it lazy money - it was just sitting there uselessly. The reverse mortgage frees up your lazy money so you now have access to it and can put it to good use.
When you work, you're earning money that is taxed. When you use money that is already yours, you typically do not.
If you have a traditional (forward) mortgage, what happens to the interest deduction that you were receiving each year for mortgage interest paid, when you get a reverse mortgage to pay it off? Interest is deductible when it is actually paid. So while interest accrues on the outstanding reverse mortgage loan balance, if you do not actually pay for any interest, there is no tax deduction. Instead, the deduction is deferred until the reverse mortgage is paid off (when the home is sold or refinanced).
But, remember that you can pay down your reverse mortgage at any time. And any payments that are applied toward interest are deductible just as they are with a regular mortgage. So think of the reverse mortgage as a way to free up your financial picture - you can still get the mortgage interest deduction if you want it.
More on this topic tomorrow!
