California Reverse Mortgage News

The Reverse Mortgage Tax Deduction For Heirs That No One Is Talking About

June 7th, 2016 1:19 PM by Kevin Walton

There is a reverse mortgage tax deduction that is available to heirs that no one seems to know much about.
The unpaid interest that's accumulated over time that's owed on the balance of the loan is able to be claimed by whomever is showing on title to the home at the time it is sold. 
If the parents are deceased, than the deduction is available to the heir (s) of the estate which could be windfall.

Some heirs may look at a reverse mortgage as a way to lose their inheritance since mom and dad are gobbling up their equity, but this reverse mortgage tax deduction may change that thought process a bit.

The way it works is the reverse mortgage lender will ask for documentation as to whom is inheriting the property once a life event happens which prompts the property to be sold. Once the documentation is submitted and accepted by the lender a 1098 mortgage interest paid statement is generated to one person. 

The mortgage interest figure is than used as a tax deduction against any taxes owed which resulted from the liquidation of the parents estate.  Whatever is left, after deducting lender fees, and lender mortgage insurance, is than available to be taken as an income tax deduction for the individual(s) which could result in a nice sum, possibly in the tens or even hundreds of thousands of dollars.
The individual(s) may have to amend their tax return, if they've already filed, to claim the benefits of the reverse mortgage interest tax deduction.

Estate planning is a crucial element here. Establishing a family trust with instructions would be a benefit if there are multiple beneficiaries on how the interest deduction is divided. It may be a good idea to create a family trust prior to the origination of the reverse mortgage so that things get done at the same time.
Upon the sale of the property and the property is held in a family trust, even though the 1098 may be made payable to one person, the trust can have instructions to divide up the interest paid in equal amounts so that not just one person gets it.
It will be noted in the liquidated estate's final tax return as well.

It's also worth mentioning that if the senior citizen was making payments on the reverse mortgage to paydown the balance of the loan, the amount of the interest deduction is less but as with any reverse mortgage, monthly payments are not required.  Each month a payment isn't made, the monthly interest owed is tacked onto the balance of the loan. 

It is also possible that the accumulated mortgage balance may exceed the property value. If that's the case the family should do everything in their power to sell the home instead of letting the lender foreclose or giving it back to the lender. 
If they allow this to happen, they would forfeit the interest deduction.
The dollar amount of the deduction available may play a role whether on what path you will choose.

The reverse mortgage interest tax deduction will be a talking point as the baby boomer generation passes on, and typically it's not discovered until the estate gets liquidated.
A reverse mortgage isn't for everyone, but for those in which it makes sense, it's important that heirs and beneficiaries to get educated on the ins and outs.

I'm an expert on the reverse mortgage.  If you have any questions or concerns feel free to call or email me.

Kevin Walton
Best Capital Funding
800-506-0632 ext. 0 

Posted by Kevin Walton on June 7th, 2016 1:19 PM