An option for borrowing money that has grown in use in recent years is a reverse mortgage. But what is a reverse mortgage? And what are the tax implications of exercising a reverse mortgage?
Read on to learn answers to these questions and more about reserve mortgages. If you have questions about federal income taxes or other tax topics, please visit our web site’s “Tax Relief” page.
What is a reverse mortgage?
In the mid-1980s, the value of many homes had skyrocketed far above the original mortgage or purchase amount—especially in urban areas on the west coast and in the northeast part of the United States. In addition, people’s life expectancies were increasing, leaving many without enough savings to last throughout their growing retirement years. In many cases, these people had significant equity in their homes, but there was not an easy method available to allow people to get that equity out of their homes without selling the property.
Therefore, in 1987, the Department of Housing and Urban Development, or HUD, created the reverse mortgage. A reverse mortgage allows someone aged 62 or older to take out a loan against the equity in their home. As is the case with a traditional home equity loan, the homeowner can receive money from the reverse mortgage in a lump sum or as a series of payments over time.
However, a reverse mortgage is different from a home equity loan in that the borrower is not required to repay any portion of the amount borrowed so long as they continue to live in the home. Interest on the amount borrowed is simply added to the balance owed by the homeowner to pay off the reverse mortgage.
The borrower can repay the balance owed, or at the time of the borrower’s death, sale of the property will be used pay off the reverse mortgage loan balance.
Who should use a reverse mortgage?
Reverse mortgages are best used by individuals with significant equity in their homes who plan to reside in the home long term. Reverse mortgages are typically not recommended for people who are seeking the loan for any of the following reasons:
- Small home repairs
- Loaning money to friends or relatives
What are the tax implications of a reverse mortgage?
A reverse mortgage may not have any tax consequences depending on the borrower’s situation. Any money received by a borrower from a reverse mortgage is not taxable for state or federal income tax purposes. And a reverse mortgage does not affect property taxes, as the borrower must still pay them as the owner of the home and the taxes are still deductible on the borrower’s tax return.
However, if a borrower has a traditional mortgage and refinances it into a reverse mortgage, the borrower would lose the tax deduction from paying interest on the traditional mortgage.
What if I want to discussion my situation with a tax attorney?
If you have questions about reverse mortgages, federal income taxes, or other tax issues, you can call the phone number located at the top of this web site to get help. A tax attorney will contact you to discuss all of your tax issues. The initial conversation is free of charge and does not obligate you to anything further. Therefore, please get help today.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.