Understanding how the IRS views your reverse mortgage income is the key to knowing how to take advantage of this unique mortgage product.
There is a great deal of misunderstanding about how reverse mortgages work. Since 1987, this mortgage product has been used as a great way for senior citizens to capture the equity of their homes. Reverse mortgages pay the homeowner the equity of the home in a one lump sum, monthly payments, or as a line of credit. The loan is not due until a preset time, the owner dies, leaves the home for 12 months or more, or sells the house. Many people get nervous about what tax implications there are with this sort of loan.
Does the IRS Tax the Money from a Reverse Mortgage?
No, the IRS views this money as a loan advance and not income. That means that you are not taxed on the payments. No matter how you take the payment; a lump sum, monthly payout, or credit line there is not any tax. There is no limitation to what you can do with your money.
Can the Interest be Written Off?
This answer can seem a bit confusing at first. Traditional loans allow you to write off the interest paid yearly. Reverse mortgage interest is all paid after the loan become due. Only then can you write off the interest. You should consult a tax advisor for the best way to maximize this write off.
So I do not pay any Income Tax on a Reverse Mortgage?
While you do not pay taxes on the amount of money received, be aware that any income generated from that money can be taxed. If you invest in CD’s or put it into saving or other investments, any returns can be taxed.
Reverse mortgages are a valuable tool for senior citizens that want to tap the equity of their home. By understanding more about the tax implications, people can put together a good budget and financial plan. With sound planning and advice, people can relax in their retirement years, by taking advantage of reverse mortgages.
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