A reverse mortgage is one way that senior citizens can get income for themselves, especially after they retire. Senior citizens can use their home value to live off of until they decide to move out or sell the home. But before a reverse mortgage is taken, people should understand more about the tax ramifications.
A reverse mortgage is a loan based on the equity of a home. Borrowers are able to borrow enough money against the equity of the home if the owners meet qualifications which include age (62 or older), ownership status and type of home owned. The Housing and Urban Development department (HUD) has developed guidelines and federal restrictions concerning the reverse mortgage. See the Resources section below for a link.
Income from a reverse mortgage is not the same as income from work, according to the Internal Revenue Service (IRS). The IRS sees it as an advance on a loan based off of home equity, which is not taxable. Therefore, any monies gained from a reverse loan are considered tax-free.
People with a reverse mortgage still have to pay interest on the home loan. It doesn't have to be paid until the end of the term which is usually when the home is sold or the owner passes away. But if borrowers decide to pay on the interest early, it is still tax-deductible within the year that the taxes were paid.
Some Social Security benefits are subject to federal taxation, dependent upon how much income the beneficiary is generating. One advantage of a reverse mortgage is that the income generated from it does not count towards the borrower's income.
As long as the owner is occupying the residence, he is still responsible for property taxes. If you fail to pay them, a tax lien could be held against your home. The lender has the option to not execute your reverse mortgage payments until the lien is paid off. For those who took the reverse mortgage payment as a lump sum, lenders can ask for it back and deduct any taxes owed from it.