Are the Proceeds of a Reverse Mortgage Taxable Income?
A reverse mortgage is a specialized mortgage loan that allows homeowners aged 62 years and older to access some of the equity in their homes without having to sell the property or take on the burden of monthly mortgage payments. Borrowers can choose to receive the funds borrowed in several different ways such as in monthly payments, as a lump sum, or in a line of credit.
When researching the reverse mortgage option many homeowners ask whether the proceeds, or money received, from the loan are considered taxable income? While it is important for each individual to consult a CPA or other tax professional on the specifics of his or her scenario, in general borrowers do not need to pay income tax on reverse mortgage proceeds.
According to the IRS in the section on reverse mortgages in Publication 554 (2012), Tax Guide for Seniors, “Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable.”
A reverse mortgage borrower may receive other taxable income, be owed a refund for taxes withheld, or have conducted a financial transaction that necessitates the filing of a state and Federal Income Tax return.
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Is the interest paid on a Reverse Mortgage tax deductible?
In many cases the interest and some of the fees paid on traditional forward mortgages are tax deductible. These expenses may also be deductible in the case of a reverse mortgage, but not until they are paid, which is generally when the loan is paid in full. According to the IRS, this deduction is likely limited because it is subject to the limit on home equity debt. IRS Publication 936 (2012), Home Mortgage Interest Deductionshows that for tax year 2012 this home equity debt limit was set to “the smaller of $100,000 ($50,000 if married filing separately), or The total of each home’s fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home.”
Keep in mind that the US tax code is complicated and subject to frequent changes. The information stated here is not a substitute for the advice and guidance of a CPA or other tax professional.