Reverse mortgages aren’t generally considered components of a tax-saving strategy.

Some proponents tout the fact that reverse mortgage loan proceeds are not taxable income as a big selling point. But this really is no big deal. Reverse mortgage borrowers are, after all, borrowing ther own home equity so there is no reason why income tax should be paid.

Too, interest paid on a reverse is tax-deductible (as is interest on a forward mortgage). But since the loan (and interest on the loan) typically become payable upon the homeowner’s death, the usefulness of the tax benefit is greatly diminished.

A recent article at SmartMoney.com (“A Tax-Skipping Move for Senior”) suggests how reverse mortgages can be used in a strategy to avoid taxes on gains from large-scale home appreciation. In a nutshell:

1. Some seniors who may consider selling their homes to generate cash for living can face a stiff tax bill if the gain on the home sale exceeds IRS limits (generally, $250,000 or $500,000 for single and married homeowners, respectively).

2. Staying put instead and taking out a reverse mortgage can be a viable, cost-effective way to turn the home equity into cash. As the article points out:

Seniors may object to the notion of borrowing against their homes to solve cash flow problems. But here’s what to consider: If the cash you need comes from selling your greatly appreciated home, the cost of getting your hands on the money will be a huge tax bill. In contrast, if the cash comes from a reverse mortgage, the only cost will be loan fees and interest charges. Those may be a small percentage of the taxes you could permanently avoid by continuing to own your home. (If they are small a tiny percentage, this is not such a great idea.)

Of course, your need for cash and your desire to avoid triggering taxes if possible may not be the only issue here. You may strongly prefer to sell your home for other valid reasons such as moving to a home that’s smaller and easier to manage. But if you would be satisfied to remain in your home for as long as you can manage to pay the bills, the reverse mortgage idea may be the best tax-smart strategy for you.

Reverse mortgages are mostly used by low to moderate income seniors with limited options for raising cash to pay living expenses. However, as this article points out, reverse mortgages can also be important tools for high net worth seniors owning greatly appreciated homes.

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A Few More Related Articles of Interest:

Building Wealth for Retirement

Using a Reverse Mortgage to Get Out of Tight Spots

Home Equity Loan With a Reverse Mortgage, Your Home Pays You

Americans Need a Reality Check About Their Retirements

New Reverse Mortgage Tools Introduced