It’s April 15th and you know what that means. Taxes are due! In honor of tax day, we are answering three of the most common questions we get regarding reverse mortgages and taxes.*
Will I have to pay income taxes on the proceeds of a reverse mortgage?
Because a reverse mortgage is a loan rather than a source of income, you will not have to pay income taxes on it. Because the loan will eventually be repaid, the payout is not taxable.
What about property taxes?
Since your name stays on the title, you remain the owner of your home.** As the owner of the home, you are still responsible for paying insurance, maintenance costs, and property taxes. Payment of these taxes is an important part of your responsibilities. If you do not pay taxes, you could lose the home. Financial assessment may help prevent this from happening. If the financial assessment determines you may not be able to uphold these financial responsibilities, the lender is required to withhold a Life Expectancy Set-Aside (LESA) from the reverse mortgage proceeds for the payment of property charges during the life of the borrower. The need for a LESA, the funding amount of the LESA, and the structure of the LESA, are based on the results of the financial assessment of the borrower.
Can interest charged on my loan be deducted for taxes?
You cannot deduct your interest expenses on a reverse mortgage until you have made payments on the interest. If and only if you have made payments on the interest of your reverse mortgage, then you could deduct those expenses on your taxes.*
*We recommend discussing any tax issues or questions with a certified tax professional.
**You remain responsible for counseling costs, taxes, insurance and maintenance expenses.