A reverse mortgage is usually tax free. Homeowners are allowed a $250,000 income tax exclusion if single and $500,000 for a couple when their primary residence is involved.
What Does A Reverse Mortgage Do?
It is simply a mortgage on your house which allows people 62 years old or older, to tap home equity to occupy their home without monthly mortgage payments and use equity as they wish. You are responsible for all real estate taxes, insurance, maintenance fees, and upkeep on your home while you have the reverse mortgage in effect. The equity you are receiving is tax free, just as if you had sold your property, no matter which dispersal method you choose. There are no “mortgage interest” deductions on your own money.
Can I Take Any Tax Deductions On My Reverse Mortgage?
No you cannot. You are simply receiving your home equity in a different form. However, you may deduct real estate taxes on your income tax to offset any actual income, pension, or social security earnings. An unusual circumstance for savvy borrowers whose reverse mortgage agreement allows them to pay off interest prior to the payoff of the reverse mortgage itself, can deduct that interest on their income tax in the following year. Otherwise, interest is paid and deductions taken at the time the reverse mortgage is paid off by the owner or the owner’s estate.
If I Pay Off My Reverse Mortgage Will It Still Be Tax Free?
Once you pay off your reverse mortgage and sell your home, all proceeds from any potential profit as well as what you received from your reverse mortgage are tax free. Only in the extremely unlikely event that after interest deductions and offsets you exceed the allowable exclusion from your primary residence could any income tax be owed.
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