At some point in your journey of homeownership, you may get very close to paying off your mortgage, or better yet, make your final mortgage payment. Congratulations – this is a significant accomplishment!
Once your home is paid in full, it now represents pure equity. These funds could be used in a financial emergency, medical expenses, travel and leisure – the possibilities are endless. But how do you gain access to this home equity?
You might have seen commercials or heard about a “reverse mortgage.” But what exactly is a reverse mortgage? What are the tax implications, if any? The mortgage professionals at Pacor Mortgage are here to offer some insight.
What Is a Reverse Mortgage?
A reverse mortgage is a loan available to senior homeowners who have substantial home equity. Equity is defined as how much your home is worth, minus the amount you owe on it (if anything). Like a second mortgage, a reverse mortgage allows you to access your home equity in the form of a lump sum, a line of credit, or a fixed monthly payment.
To qualify for a reverse mortgage, you must meet the following Home Equity Conversion Mortgages (HECM) requirements:
- Be 62 years of age or older
- Own the property outright or have a minimal mortgage balance
- Use the property as your principal residence
- Not be delinquent on any federal debt
- Participate in a consumer information session given by an approved HECM counselor
The following eligible property types must meet all Federal Housing Administration (FHA) property standards:
- Single-family home or multi-family (1-4 units) home with one unit occupied by the borrower
- U.S. Department of Housing and Urban Development (HUD) approved condominium
- Manufactured home that meets FHA requirements
Are the Payments Tax-Deductible?
According to the Internal Revenue Service (IRS), “Because reverse mortgages are considered loan advances and not income, the amount you receive isn’t taxable. Generally, any interest (including original issue discount) accrued on a reverse mortgage is considered interest on home equity debt and isn’t deductible.”
However, there are factors where the interest may be deductible. Consider the following:
- Regardless of type, interest is not deductible until paid. As long as the borrower still lives in the home, a reverse mortgage loan does not need to be repaid. Thus, the interest on a reverse mortgage is not deductible by anyone until the loan is paid in full.
- Reverse mortgages are classified as equity loans. Under the 2017 tax-reform rules of the Tax Cuts and Jobs Act (TCJA), equity debt interest is not tax-deductible during the years 2018 through 2025. In years before 2018, the deductible equity debt interest was limited to the interest accrued on the first $100,000 of debt, and equity debt interest was not deductible by taxpayers subject to the alternative minimum tax.
However, the interest deduction is limited to the yearly deductible (had you paid it). The interest accrues until the loan is paid off, at which time it is deductible.
So, who can deduct the interest once the loan is paid?
- Borrower. If you pay off the loan while you’re still living, you can deduct the sum of the interest you would have been entitled to deduct each year had it been paid.
- Beneficiary. When your beneficiaries inherit the home and pay off the mortgage, they can deduct the interest as an itemized deduction on their individual income tax returns. The deduction would be the sum of the interest the deceased would have been entitled to deduct each year had it been paid.
Trust Pacor Mortgage
Pacor Mortgage offers a variety of loan products and programs, including options that address many of the unique challenges facing homeowners today. From purchasing and refinancing to reverse mortgages, our team of professionals is ready to help you understand your options and explain any tax implications. Learn how fast and easy the mortgage process can be by calling us at 773-881-7744 or visiting our website.