A reverse mortgage is a means of generating income when you employ the equity in your home. This loan provides an excellent way for seniors to get money if finances are not working well. However, there are some tax implications one needs to be aware of.
Reverse Mortgage Payments: Are they taxed?
One needs to know that a reverse mortgage will not make funds available classified as income when talking about finance. The funds you get from a reverse mortgage will be considered a loan since the money does not come through work, effort, or even investment. As a result, the funds you get from a reverse mortgage cannot be taxed and do not impact your Social Security and Medicare benefits.
The funds from reverse mortgage payment will not be taxed as the lender is simply paying back the money you paid via your mortgage payments, and you are returning the equity you acquired on the property through the years. The mortgage payment came from your income, and it has been taxed already.
Effect of Reverse Mortgage on Tax Deductions
A reverse mortgage is like the flip side of a regular mortgage, which means the tax implications, and the tax deductions are different. In a typical mortgage, the interest paid by the borrower might be written off on every year's taxes. You, however, will not write the interest off with a reverse mortgage until they pay the loan.
IRS Publication 936 specifies that
Whatever interest that comes from a reverse mortgage cannot be deducted until the moment you pay it, that is the time they pay off the entire load.
As long as the responsibility of paying them lies on you, you can write property taxes off as a deduction if you have a reverse mortgage. However, not up to 30% do this even with a regular mortgage. Besides, the new tax law allows homeowners to write off a few of their property taxes; many people will not be affected by this.
Reverse Mortgage and Capital Gains Tax
Even though reverse mortgage has no direct impact on taxes, it can have an indirect effect when it comes to capital gains. This is the capital gains from the sale of an asset. With a capital mortgage, the sale of a home is rare as one needs to remain there. This, however, is inevitable at times.
The sale of your home to make payment for the reverse mortgage by you or any family member could trigger capital gains tax debt. Worthy of note is that you need a considerable capital gain before getting to the threshold where you will catch Uncle Sam's attention.
For single taxpayers, as much as $250,000 of their home’s appreciation cannot be taxes. This value is double for married people filing jointly. The taxes will be on the appreciation that is above this point.
With this, if you bought your home for $350,000 and sold it for $500,000, you will not have to worry about capital gains taxes since the profit was $150,000 when the house was sold.
However, if the home was your primary place of abode for at least two or five years, you have a capital gains tax exemption. Also, if the move is due to health or work reasons, there are further exemptions.
Conclusion
A reverse mortgage can be considered as the gradual sale of a house. Also, the costs, interest, fees, and others accompanying a reverse mortgage translate to less income than what you will have if it is sold outrightly. This makes a reverse mortgage a viable option for seniors who want more cash, desire to live in their current place of abode permanently, and will not mind another family member having the home after their death.
Many people who do not have kids do go through this option since it is like the house is sold after they are gone, but they will spend the money before their death.
There is no effect of a reverse mortgage on your taxes except in a couple of cases that affect what you pay or what you get to write off. As a result, make sure you are confident that it is right for you to consider it to have more cash flow.
With a reverse mortgage, many seniors have had secured finance in their golden years. As a result, fear of taxes should not affect your missing out on a chance to live a better life.
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Karen Munoz, EA