Reverse Mortgages and Taxes: The Basics
Seniors in their retirement years must keep a very close eye on their incomes. This for many reasons, but one of the most important is because an influx of cash could change your tax situation. According to the IRS, “Reverse mortgage payments aren’t taxable. Reverse mortgage payments are considered loan proceeds, not income. The lender pays you, the borrower, loan proceeds (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home.”
Therefore, reverse mortgages will typically not affect a senior’s ability to qualify for certain support or entitlement programs based on income. However, the IRS does note that interest accrued on a reverse mortgage cannot be deducted from your taxes until the mortgage is paid off in full. Even then, it may be restricted to due to the limit on home equity debt.
So, while your payments will not increase your taxable income or tax liability, you also do not gain any tax deductions from this arrangement until the mortgage is paid off.