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Reverse Mortgage Tax Deductions

Disclaimer: Alpha Mortgage Reverse Division is not a tax advisor and does not offer tax advice. We recommend consumers consult with licensed tax professionals regarding potential tax deductions related to reverse mortgages. The information on this page may have changed since it was posted. Please verify any of the topics below with your tax advisor.

When it comes to tax deductions, a reverse mortgage offers similar benefits as a traditional mortgage. However, there may be some key differences. Namely, the accrued interest in a reverse mortgage may only be deductible after it is paid. This may be true for a traditional mortgage as well, but since reverse mortgage borrowers generally do not make payments on their loan, the tax deduction may be little more difficult to get.

Reverse Mortgage Tax Deductions – The Basics

1. Typically, you can only deduct the interest that you’ve paid. So, if you have not made any payments toward your accrued mortgage interest, then you may not have anything to deduct. Even if you don’t pay anything toward the principal balance, if you manage to pay the interest every year, you may be able to get the tax deduction.

2. A second thing to keep in mind is that deducting your reverse loan interest may be allowed on only certain portions of your mortgage proceeds. In other words, the deductible interest may depend on what you used the payments for.

According to the Journal of Financial Planning, a taxpayer may deduct interest paid on only certain portions of the loan proceeds such as portions used to construct, acquire or substantially improve the mortgaged residence. (source: http://www.fpanet.org/journal/BetweentheIssues/LastMonth/Articles/TheTaxationofReverseMortgages/)

Additionally, interest accrued and paid on portions of the mortgage proceeds that go toward refinancing previously existing acquisition indebtedness may also be deductible. This is where things get a little more complicated, so be sure to go over these points with your tax professional.

3. Typically, mortgage insurance premiums are not tax deductible with reverse mortgages. However, there may be some instances where a portion of the mortgage insurance premium may be deductible under certain circumstances. Check with your tax professional for details.

4. When it comes to paying points on your reverse mortgage, some may be deductible if they satisfy certain statutory or IRS criteria. Again, check with your tax professional.

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5. Some fees may be tax deductible on a reverse mortgage, such as the origination and broker fees.

6. If the borrower dies without having made any interest payments on their reverse mortgage, that person’s heir may be able to choose to pay off the interest and claim a tax deduction.

7. There are limitations to the amount of interest claimed. According to the IRS, the amount of interest claimed cannot exceed $100,000. This is because the IRS places a limit on the amount of debt that can be considered home equity debt, which is how the IRS may view reverse mortgages.

Taxes can become pretty complicated with a reverse mortgage, so it’s best to enlist the help of a highly qualified mortgage tax specialist when preparing to take out a reverse mortgage and/or prepare your yearly return. The information provided in this post is intended to give readers a basic overview of tax deduction information relating to reverse mortgages – it should not be used as a substitute for professional, legal advice.

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Please keep in mind that the reverse mortgage industry is constantly changing and some of the information contained on this site may not be current. Please ask a licensed reverse mortgage professional for up-to-date guidelines.