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Below are some frequently asked questions and answers about reverse mortgages and taxes. In addition to these FAQ’s, we have questions and answers focusing on other reverse mortgage topics:
If you have questions about reverse mortgages not included here, you can use the form at the bottom to submit it! We’ll do our best to get you a prompt and accurate reply.
- What kind of income taxes do I pay on my reverse mortgage loan disbursements?
- Is interest paid on a reverse mortgage tax-deductible like interest paid on a regular home equity loan?
- Does taking a reverse mortgage trigger “capital gains” taxes?
- Do payments from a reverse mortgage count towards the income threshhold for determining whether regular Social Security benefits are subject to federal income tax?
- The unused portion of a HECM line of credit grows at a rate equal to the interest rate charged on the portion of the LOC that has been drawn. Is this growth in the unused portion of a HECM LOC taxable interest income?
- Does a reverse mortgage affect property taxes on my home?
- ask for 250,000 limit. use only 10,000 a
year for 10 years. at that time sell the house, and pay the loan off. how much would the balance of the loan cost.- How much time will my heirs have to sell/re-finance my home? I’ve heard unscrupulous lenders are quick to foreclose on the loan to collect more fees. And since they can usually sell the home for more than the loan there is little risk to them.
Reverse Mortgages and Taxes Questions and Answers
What kind of income taxes do I pay on my reverse mortgage loan disbursements?
Because the reverse mortgage is a loan based on your home equity, the IRS does not consider it income and all loan funds are tax free. The Internal Revenue Service treats monies received from a reverse mortgage as loan advances and not taxable income. The payments from a reverse mortgage also should generally not be subject to state or loc income taxes. You should always consult a tax advisor about your particular situation.
Is interest paid on a reverse mortgage tax-deductible like interest paid on a regular home equity loan?
Interest is deductible in the year paid. Interest on a reverse mortgage typically is paid at the end of the loan (i.e. sale of home or death of owner). You can make partial pre-payments (including interest) on most types of reverse mortgages. This can be a sensible tax strategy in some cases. If you do chose to pre-pay be sure to direct that your payments go towards the interest you owe. Check with a tax expert concerning your specific situation.
Does taking a reverse mortgage trigger “capital gains” taxes?
No. Under a reverse mortgage, the home is not considered to be “sold” for tax purposes. Therefore, there are no capital gains tax on accumulated appreciation in the home. Further, if the home is being passed on to heirs, they may be able to sell the home without paying capital gains tax due to the “step-up”basis rule that applies to inherited property. Check with a tax expert concerning your specific situation.
Do payments from a reverse mortgage count towards the income threshhold for determining whether regular Social Security benefits are subject to federal income tax?
No reverse mortgage loan proceeds do not count towards this threshhold (exclusion ceiling). This is one advantage of reverse mortages have over annuities (which payments do count toward the exclusion ceiling).
The unused portion of a HECM line of credit grows at a rate equal to the interest rate charged on the portion of the LOC that has been drawn. Is this growth in the unused portion of a HECM LOC taxable interest income?
No, growth in the unused portion of a HECM line of credit is not considered taxable income.
Does a reverse mortgage affect property taxes on my home?
Homeowners who take out a reverse mortgage are still required to pay their property taxes in a timely manner. In fact, failure to pay property taxes under a reverse mortgage can have serious consequences. This is because tax liens are one of the few liens that stand in front of a loan, so lenders will take stern actions to ensure taxes are paid. The lender has the right to stop monthly payments to you until the taxes are paid. If you received the reverse mortgage as a lump sum, the lender can demand payment in full for non-payment of taxes. You will be given the option of having property taxes (and insurance premiums) deducted from your reverse mortgage loan payments and paid directly by the lender.
ask for 250,000 limit. use only 10,000 a
year for 10 years. at that time sell the house, and pay the loan off. how much would the balance of the loan cost.First of all, with current lending limits at a maximum of $362,790, you would have to be in your late 70s to have access to $250,000 as a line of credit. But lets start with something kind of on the same level and see what it brings you. This would depend on how old you are when the loan closes, how much the house was worth when the loan closes and where you live.
Here’s an example- 70 year old living in Washington, DC, home is valued at $400,000. They would have access to about $213,000 out of the gate but if they took 10,000 a year or roughly $800 a month for 10 years they would owe close to $160,000 at then end of 10 years. This works better if you take the $800 a month versus $10,000 each year as any money left in the credit line grows over time. That credit line by the way would have $228,000 still available for any use you might have.
Any questions, please email us back.
How much time will my heirs have to sell/re-finance my home? I’ve heard unscrupulous lenders are quick to foreclose on the loan to collect more fees. And since they can usually sell the home for more than the loan there is little risk to them.
This is a question that has been asked alot lately. Your heirs or your estate has 6 months to pay off your loan by selling the property or refinancing it. If 6 months comes and you are in the process of either you can file for up to two (90) extensions so that’s effectively 12 months. At that time, if you haven’t done either, HUD will come in and sell the home at whatever they can get for the property. The heirs still get whatever is remaining after fees are paid (if there is any), but they do not owe a penny if it sells for less than the accrued loan amount. This is a HUD loan, there should not be a lender involved in this process unless it was a private or proprietary reverse mortgage where the lender held the loan on its books.
What kind of income taxes do I pay on my reverse mortgage loan disbursements?
Because the reverse mortgage is a loan based on your home equity, the IRS does not consider it income and all loan funds are tax free. The Internal Revenue Service treats monies received from a reverse mortgage as loan advances and not taxable income. The payments from a reverse mortgage also should generally not be subject to state or loc income taxes. You should always consult a tax advisor about your particular situation.
Is interest paid on a reverse mortgage tax-deductible like interest paid on a regular home equity loan?
Interest is deductible in the year paid. Interest on a reverse mortgage typically is paid at the end of the loan (i.e. sale of home or death of owner). You can make partial pre-payments (including interest) on most types of reverse mortgages. This can be a sensible tax strategy in some cases. If you do chose to pre-pay be sure to direct that your payments go towards the interest you owe. Check with a tax expert concerning your specific situation.
Does taking a reverse mortgage trigger “capital gains” taxes?
No. Under a reverse mortgage, the home is not considered to be “sold” for tax purposes. Therefore, there are no capital gains tax on accumulated appreciation in the home. Further, if the home is being passed on to heirs, they may be able to sell the home without paying capital gains tax due to the “step-up”basis rule that applies to inherited property. Check with a tax expert concerning your specific situation.
Do payments from a reverse mortgage count towards the income threshhold for determining whether regular Social Security benefits are subject to federal income tax?
No reverse mortgage loan proceeds do not count towards this threshhold (exclusion ceiling). This is one advantage of reverse mortages have over annuities (which payments do count toward the exclusion ceiling).
The unused portion of a HECM line of credit grows at a rate equal to the interest rate charged on the portion of the LOC that has been drawn. Is this growth in the unused portion of a HECM LOC taxable interest income?
No, growth in the unused portion of a HECM line of credit is not considered taxable income.
Does a reverse mortgage affect property taxes on my home?
Homeowners who take out a reverse mortgage are still required to pay their property taxes in a timely manner. In fact, failure to pay property taxes under a reverse mortgage can have serious consequences. This is because tax liens are one of the few liens that stand in front of a loan, so lenders will take stern actions to ensure taxes are paid. The lender has the right to stop monthly payments to you until the taxes are paid. If you received the reverse mortgage as a lump sum, the lender can demand payment in full for non-payment of taxes. You will be given the option of having property taxes (and insurance premiums) deducted from your reverse mortgage loan payments and paid directly by the lender.
ask for 250,000 limit. use only 10,000 a
year for 10 years. at that time sell the house, and pay the loan off. how much would the balance of the loan cost.First of all, with current lending limits at a maximum of $362,790, you would have to be in your late 70s to have access to $250,000 as a line of credit. But lets start with something kind of on the same level and see what it brings you. This would depend on how old you are when the loan closes, how much the house was worth when the loan closes and where you live.
Here’s an example- 70 year old living in Washington, DC, home is valued at $400,000. They would have access to about $213,000 out of the gate but if they took 10,000 a year or roughly $800 a month for 10 years they would owe close to $160,000 at then end of 10 years. This works better if you take the $800 a month versus $10,000 each year as any money left in the credit line grows over time. That credit line by the way would have $228,000 still available for any use you might have.
Any questions, please email us back.
How much time will my heirs have to sell/re-finance my home? I’ve heard unscrupulous lenders are quick to foreclose on the loan to collect more fees. And since they can usually sell the home for more than the loan there is little risk to them.
This is a question that has been asked alot lately. Your heirs or your estate has 6 months to pay off your loan by selling the property or refinancing it. If 6 months comes and you are in the process of either you can file for up to two (90) extensions so that’s effectively 12 months. At that time, if you haven’t done either, HUD will come in and sell the home at whatever they can get for the property. The heirs still get whatever is remaining after fees are paid (if there is any), but they do not owe a penny if it sells for less than the accrued loan amount. This is a HUD loan, there should not be a lender involved in this process unless it was a private or proprietary reverse mortgage where the lender held the loan on its books.