Tax Consequences of a Reverse Mortgage

People considering a reverse mortgage should take into account the potential tax consequences. While this article will help, it is important to consult a licensed tax consultant before making a decision.

The IRS allows you to deduct the interest you pay on the home you live in. The trick is, the interest is only deductible when it is paid, not when it accumulates. Because you do not pay monthly payments on a reverse mortgage, you are not actually paying any interest.

You or your estate will pay the interest on a reverse mortgage when the loan becomes due. This happens when you pass away, move out of the home, or refinance the reverse mortgage. At that point, the home is sold or refinanced and the entire interest due for however long you’ve had the reverse mortgage is paid. At that point, the interest is tax deductible. Unfortunately, it is often at a time when you don’t really need it.

The average homeowner who claims an interest deduction on a standard mortgage saves just under $2,000 per year. This is a substantial sum and should be taken into consideration when figuring the costs and benefits of taking out a reverse mortgage. However, about 50% of homeowners choose to not even take the deduction, usually because the standard deduction is higher than their itemized amount.

If you usually take the standard deduction, a reverse mortgage will probably not have any affect on your tax bill. A reverse mortgage is a long term proposition so it’s a good idea to consider how your tax situation will change in coming years.

To fully understand your tax situation, consult a CPA. To get a fair analysis of your reverse mortgage options, get your free FROG report.